Pension systems

An older women in Shaanxi province, China.One of the biggest questions in the debate on social pensions is where non-contributory benefits fit within a broader pension system.

In the context of population ageing, it is natural that governments will be concerned about how much responsibility they should take for providing income security in old age.

Dual role of pensions

It is important to recognise that pension systems have more than one role. On one hand, contributory pensions are a way for individuals to save money during their working lives so they have an income when they get older.

However, there will always be some people who will be unable to save enough. The second key role of pension systems is to alleviate the poverty of older people on a reduced income.

This is where social pensions come in.

Can social pensions reduce poverty?

There is a theory that improved contributory pension systems will mean that individuals are able to save more and so reduce the need for social pensions.

However some people – such as mothers who spend years caring for children and people on low incomes throughout their lives – will never be able to save enough for their old age.

Even in richer countries, governments continue to subsidise pension systems to reduce poverty in old age. In some cases, this may be done through the contributory system, for example by creating a basic minimum pension for those who have not made sufficient contributions.

This approach, however, is far less effective in most of the developing world. Many people in developing countries work in the informal sector in low-paid jobs and have no access to formal pension systems at all.

This makes social pensions especially relevant.

Are non-contributory pensions harmful to contributory schemes?

It is argued that social pensions can create disincentives for individuals to save in other pension schemes. A person might question why they should save in a pension scheme when they can still get a benefit for doing nothing at all.

This is a particular danger of means-tested social pensions. In these cases, receipt of a contributory pension benefit will make an individual ineligible for a non-contributory pension. This, in effect, creates a tax on their saving.

In fact, one of the strongest arguments for universal social pensions is that they avoid such disincentives. Any extra saving will make no difference to the receipt of a social pension.

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