Economic impacts

Lila, 63, from Bangladesh lost her cowshed and her home because of cyclone Sidr.One of the central policy debates around social pensions focuses on the trade-off between social protection and the goals of economic growth and equity.

Governments are often concerned that social protection programmes could generate large and long-term liabilities beyond their budgetary capacity and harm economic growth.

In fact, social protection can have a positive impact on growth in developing countries in a number of ways.

Pensions support the local economy

A social pension to older people can inject cash into local economies, by giving local people spending power and access to markets. This helps drive growth by stimulating consumption, particularly in rural areas.

A regular cash transfer has knock-on effects that "multiply" the wealth in an area. People have more money to spend, and so local shops and other services benefit. This means they may be able to expand their range of services and create money needed to invest in local infrastructure and business.

Evidence

  • A World Bank study found that consumption growth among pension beneficiaries in rural areas is twice the amount of the transfer. (Martinez 2004)
  • An International Labour Organisation (ILO) study found that "pension payday is when the wheel of the local economy goes round in rural Brazil". (ILO 2002)

Pensions break poverty traps

Credit is essential to invest in productive assets and the accumulation of capital, for example educating household members, starting up a business.

However, poor older people are unable to exploit such growth-promoting opportunities as they are barred from taking out credit.

Without social protection, extremely vulnerable people often develop negative survival strategies that perpetuate poverty.

A social pension can enable the poor to overcome credit market failures. Improving the availability of credit can enable households to invest in human and productive capital. This helps to move them onto cycles of rising income and improved opportunities.

Evidence

  • In Swaziland, 49% of respondents stated that they experienced less financial difficulties after receiving the Old Age Grant. (RHVP, HelpAge International 2010)
  • Regular payments, such as pension benefits, enables beneficiaries to access loans from banks, by showing the magnetic card which is used by them to collect their pensions. (Schwarzer, 2002)

Pensions enable older people to work

Evidence shows that the regularity and predictability of social pensions means older people can invest in income earning activities. For example, pensions are often used to invest in agriculture.

Social pensions can also be important collateral, enabling older people to access capital in cases where micro-credit and micro-finance programmes exclude older people's participation.

Evidence

  • The High Level Task Force on the Food Price Crisis chaired by Ban Ki-Moon recommended "comprehensive, targeted social protection systems that achieve universal coverage of vulnerable groups and link to basic social services will build resilience to future shocks".
  • South Africa's non-contributory pension scheme found an increase in the numbers of poor unemployed adults looking for work or find employment. (Samson et al 2004)

Case study: Namibia

This video by HelpAge shows some of the economic benefits of the social pension in Namibia.

Resources on the topic economic impacts

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