Non-Contributory Pensions

Rosangela Bando, Sebastian Galiani, and Paul Gertler , January 2014.

Policy makers in the developing world face significant difficulties when attempting to alleviate poverty among the elderly. Previous efforts using contributory pensions schemes, where recipients are required to pay into the system while working in their youth, have failed to cover large swathes of the population due to the prevalence of off-the-books employment in these countries. In Mexico, the contributory pension system covered less than a quarter of the population. In response, in 2007, Mexican policy makers implemented the Older Adults Program, a non-contributory pension program offering coverage to the elderly in rural communities. Galiani, Gertler, and Bando study this program to ascertain both its effects on the elderly and whether or not it affects the earnings or savings of future pension recipients.

At the time of study, the Older Adults Program offered 1000 pesos (approximately $90) every 2 months to adults over the age of 70 in communities with fewer than 2500 inhabitants. This program extends benefits to 3.1 million adults living in 76,000 communities and is the second largest social program in Mexico, with a budget of 13 billion pesos or about 0.1% of GDP. Galiani et al evaluate this program by exploiting the cut-offs in the program’s eligibility rules, comparing outcomes for people in communities just larger than the 2500 inhabitant threshold to those for people in communities just smaller than the threshold. They also compare outcomes for individuals just above and just below the 70 year age minimum. They find that pension receipt resulted in improvements in recipients' mental health, as measured by a 12% decrease in scores on the Geriatric Depression Scale. While the share of recipients engaged in paid work was about 20% lower, much of this reduction was offset by larger shares of recipients assisting in family businesses and other household work. Finally, pension receipt resulted in an average 23% increase in consumption for the recipient’s household. 

Policy makers considering the use of non-contributory pensions to reduce elderly poverty have expressed concern that pensions may reduce the incentive for recipients' family members to work or that people anticipating receipt of the pension will draw down savings or quit working before they turn 70. Importantly, Galiani et al find no evidence supporting either concern. Consequently, Galiani et al's research provides strong evidence supporting the use of non-contributory pensions in developing nations.

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