Economic perspectives on ‘universal pension’

Every October 1 is celebrated as ‘International Day of Older Persons.’ Among the issues of concern for senior citizens in Tanzania has been universal pension. This piece is a contribution to the debate on universal pension.

Universal pension

Simply said, a ‘universal pension’ entails giving pension to all people of the retirement age whether or not they contributed to pension schemes.

It is a non-contributory scheme benefiting all senior citizens of a country. It is not a means-tested but all-inclusive scheme including those in the informal sector.

Why universal pension

Among the discourses on universal as opposed to means-tested pension include its rationale. Partly universal pension is important due to the fact that even those who have not contributed to various schemes need and deserve income security at old age. They still need to live and enjoy their lives, they have to cover at least basic costs of living and are also supporting some of their family members including children and grandchildren.

Those not getting pension in Tanzanian context include those who have been in the informal sector of the economy. At ‘retirement’ they have contributed substantially to the national economy.

The rapidly changing social-economic realities including urbanization and indeed individualism leave the elderly without adequate income security and support from their families.

Compared to means-tested, universal pension is equitable and more efficient. Distributive justice theories and realities would support universal pension as well.

On beneficiaries and rates

Economic considerations on who are the beneficiaries and amounts to be paid on monthly basis are very important to be established. In ideal situation universal pension should be made available to all of the retirement age and above.

In Tanzanian context, it should be for those from age 60 and above. Economic realities on the ground may however show that the starting age may be a bit higher, say age 65 or 70 so as to have fewer beneficiaries due to affordability.

Rates have tended to be a fixed amount per month. This is better than nothing but essentially due to inflation and exchange rate volatilities, pension rates should be based on a percentage of a given income. It can be pegged to minimum income for example.

Affordability

Affordability and sustainability of universal pension is important. This is normally a first charge item in national budgets along with other key expenditure posts such as salaries and security. Normally once started, there is no going back. However, affordability should not be the first point to consider. It should not be on whether we can afford or not. It should be on how we can afford it because we have to afford it.

Mauritius and Zanzibar started arguably not because they were economically very powerful but because of political will and commitment. Various scenarios can be developed to ensure affordability. Partly, specific non distortive taxes can be introduced to raise universal pension funds. We can learn from road fund, education fund, skills development fund and much more.

Future considerations

To partly reduce government costs in the future, systems where young people start preparing for their own pension in the long run should be in place.

If one starts setting aside a mandatory amount of money at a youthful age, it will have accumulated to large sums as pension when one retires. Therefore even if affordability was an issue of concern and worry in giving universal pension today, it can be just a short term matter if we prepare young people today to retire well in the future.

Lessons from Zanzibar

Zanzibar started paying universal pension for those aged 70 years and above from April 2017. They were paid Sh20,000 per month. With about 25,000 beneficiaries, the cost is Sh500 million monthly, or Sh6 billion annually. It is paid as first charge item in the budget. The key success factor for Zanzibar is not financial muscle, but political will and commitment - in which case the whole government machinery walked the talk.

Ways forward

The formation of a ministry that among other things deals with old people is among very clear signals of political. Highly commitment and actions to seeing the universal pension seeing the light of the day in the Mainland are needed. Walking the talk by having the pension in budgets is very important. Organizations like Help-Age International have wealth of knowledge internationally and locally on feasibility of universal pension.