International Labour Office ILO Global Campaign for Social Protection and Coverage for all: As a means to reducing poverty in Africa and Asia International Labour Office Zambia: A preliminary analysis of the scale and scope of a Universal Social Pension in Zambia Ross Leach, ILO Lusaka, 4th December 2008

Aim of the Global Campaign for Social Protection The aim of this project is to identify the amount of fiscal space needed to implement a minimum social protection package in Zambia. Lusaka, December 2008 p. 2

Key Findings of the SPER in Zambia Demographics: Zambia is expected to see an increase in the population of 60+, and; The general population is expected to rise rapidly over the next 15 years. Poverty incidence: There are high levels of poverty in Zambia; Extreme poverty is significantly higher: In rural areas, and; For children and older people, aged 60 years and above. A minimum package of benefits is affordable. Lusaka, December 2008 p. 3

60+ Demographics in Zambia Lusaka, December 2008 p. 4

Summarising the Demographic situation The 60+ population represents less than 5% of the total population in Zambia; The Zambian 60+ population is projected to increase by more than 25% over the period 2005-2021: The population may grow even faster after 2030; But there is some uncertainty over official population statistics. The 60+ female population is set to grow slightly faster than the 60+ male population. Lusaka, December 2008 p. 5

The Zambian labour market is highly informal: Almost 90 per cent of people are in totally informal employment; Labour force participation rates are high in Zambia; Employment rates are very high for older people (60+) particularly in rural areas: Low incomes for the 60+ group mean retirement is not an option. Lusaka, December 2008 p. 6

Labour Market - How does this break down? Totally informal High informality Medium informality Low informality Totally formal Total Share of group in total Male 83% 6% 3% 4% 100% Female 93% 1% 2% 88% Gender composition 49% 67% 73% 76% 52% 51% 33% 27% 24% 48% Source: Zambia – SPER Lusaka, December 2008 p. 7

Poverty - Key Indicators 50 per cent of all people in Zambia are thought to live in extreme poverty: Incidence of extreme poverty is more than double in rural areas than urban areas. Poverty levels are higher for the 60+ age group in than for those under 60 years old; Poverty rates for children are even higher. Lusaka, December 2008 p. 8

Policy option – a Universal Social Pension One of the options presented in the Zambian SPER and SB was a Universal Social Pension for the 60+ population: This was identified as an affordable policy option as part of a minimum set of social protection benefits; A child benefit and targeted social assistance were also found to be affordable for Zambia to implement. The Zambian Ministry of Labour and Social Security have developed a concept note which looks at: A 60,000 Kwacha a month Universal Social Pension for the 60+ population, and; The cost of delivering the pension. Lusaka, December 2008 p. 9

Preliminary Analysis of a Universal Social Pension Additional preliminary analysis of the Universal Social Pension has been undertaken by the ILO in Geneva; This preliminary analysis has four functions: To begin the process of quality assuring the evidence provided in the SPER/SB and the Concept Note; To look at the extent of coverage of the Universal Social Pension: How many people will benefit? To look at the adequacy of a Universal Social Pension: How much can feasibly be paid to the beneficiaries? To assess what impact the pension has on the poverty rate? Lusaka, December 2008 p. 10

Preliminary Analysis - Methodology Use demographic, GDP, and Consumer Price Index (CPI) assumptions from the Zambian Social Budget model; Analyse cost of pension for three age groups (the extent of the reform): 60+ years; 65+ years; 70+ years. Assume that everyone receives the pension from 2009; Analyse five different pension levels (the adequacy of the reform): i) 60,000, ii) 70,000, iii) 80,000, iv) 90,0000, and v) 100,000 Kwacha per month per beneficiary. Lusaka, December 2008 p. 11

Relative costs of Universal Social Pension by age Lusaka, December 2008 p. 12

Summary of pension options by age The cost of providing the 60,000 Kwacha pension for everyone 60+ is projected to be less than 0.5% of Zambian GDP for a CPI indexed pension: NB we will come back to indexing later. As there are fewer beneficiaries, providing a 60,000 Kwacha per month pension to those 65+ is less expensive than a pension for everyone aged 60+; A 60,000 Kwacha per month pension only for those aged 70+ reduces the cost even further; But, a 65+ and 70+ pension would only cover 2% and 1% of the total Zambian population respectively: The extent of the poverty alleviation would be very limited. Lusaka, December 2008 p. 13

Should the Universal Social Pension be indexed? The issue of whether the Universal Social Pension is indexed, and how it is indexed, is very important; The indexation method impacts on cost, and; Is of considerable importance to the long-term impact of the pension. Three indexation methods have been examined: No indexation; Indexing the pension by CPI; Indexing the pension by GDP per Capita. Lusaka, December 2008 p. 14

Indexing the Universal Social Pension – Baseline option Lusaka, December 2008 p. 15

Summarising indexing methods (1) No indexation means that the 60,000 Kwacha baseline would remain constant at 60,000 Kwacha over time; Based upon the assumptions made in the Zambian Social Budget, GDP is expected to grow faster than prices (CPI); So indexing the pension by GDP per capita is projected to be more expensive than indexing by CPI; Key decisions need to be made about indexing: Should the pension be linked to prices? Be kept relative to a proportion of average income? No indexation? Lusaka, December 2008 p. 16

RISK – the long-term impact of no indexation Lusaka, December 2008 p. 17

Summarising indexing methods (2) Using the inflation assumptions, no indexation would result in the Universal Social Pension being worth only 58% of its 2009 value in 2021; This means the purchasing power of this pension would have fallen significantly over time, reducing the pension’s adequacy of impact over the long-term; Indexation by either CPI, or GDP per capita maintain the value of the pension to some degree. Lusaka, December 2008 p. 18

More analysis of the adequacy of the pension It is difficult to predict exactly what 60,000 Kwacha is worth in today’s purchasing terms: This is of specific importance as the pension will not be rolled-out for a period of time. So it is worth looking at the nominal cost, and cost in terms of proportion of GDP, of higher pension levels; Hence, in addition to a 60,000 Kwacha pension, pensions up to 100,000 Kwacha per month have been analysed, split by indexation method. Lusaka, December 2008 p. 19

Different Benefit Levels – No Indexing Lusaka, December 2008 p. 20

Different Benefit Levels – CPI Indexing Lusaka, December 2008 p. 21

Different Benefit Levels – GDP per Capita Lusaka, December 2008 p. 22

Summarising higher benefit levels The analysis shows that even a 100,000 Kwacha pension benefit per month is likely to cost less than 1% of GDP. Lusaka, December 2008 p. 23

Summary of analysis – the table you have   Overview of Universal Social Pension in Zambia (2021) Not Indexed CPI Indexed GDP Per Capita Indexed AGE Number of Pension Recipients Benefit Level (Kwacha) Nominal Cost (Kwacha) % of GDP Relative CPI Purchasing Power in 2021 60,000 398.5 Billion 0.26% 688.9 Billion 0.46% 827.4 Billion 0.55% 60+ 553,539 80,000 531.4 Billion 0.35% 58% 918.5 Billion 0.61% 100% 1,103.2 Billion 0.73% 120% 100,000 664.2 Billion 0.44% 1,148.1 Billion 0.76% 1,379.0 Billion 0.92% 229.8 Billion 0.15% 397.2 Billion 477.1 Billion 0.32% 65+ 319,164 306.4 Billion 0.20% 529.6 Billion 636.1 Billion 0.42% 383.0 Billion 0.25% 662.0 Billion 795.1 Billion 0.53% 121.3 Billion 0.08% 209.7 Billion 0.14% 251.9 Billion 0.17% 70+ 168,487 161.7 Billion 0.11% 279.6 Billion 0.19% 335.8 Billion 0.22% 202.2 Billion 0.13% 349.5 Billion 0.23% 419.8 Billion 0.28% Please Note - The figures presented are based upon calculations made on demographic and economic assumptions from the Zambian Social Budget Model. The variables used may be subject to significant variation over time, and thus these results should be treated as preliminary and illustrative. Lusaka, December 2008 p. 24

Preliminary impact analysis– poverty analysis The analysis shows that a Universal Social Pension is affordable; But the relative impact on poverty alleviation must also be analysed as part of the policy development process; Some simulations of the likely impact of the Universal Social Pension on poverty indicators using data from the 2006 Living Conditions Monitoring Survey has been undertaken. Lusaka, December 2008 p. 25

Preliminary Impact Analysis – Rural Option 60000 Kwacha | all 60+ The pension reduces extreme poverty by around 20% in rural areas among the 60+ The proportion of non poor increases significantly. Lusaka, December 2008 p. 26

Preliminary Impact Analysis – Urban Option 60000 Kwacha | all 60+ The pension also reduces extreme poverty in urban areas among 60+; The proportion of Non Poor also increases from providing a pension. Lusaka, December 2008 p. 27 27

Preliminary Impact Analysis All 60 + | Different benefit levels Lusaka, December 2008 p. 28 28

Preliminary Impact Analysis Different benefit levels and age limit Lusaka, December 2008 p. 29 29

Summary of analysis The Universal Social Pension has the biggest impact on those in extreme Poverty in rural areas; Virtually all of those in total poverty in rural areas move in to the category of non-poor; Yet poverty is still very high, with nearly one-half of those in Rural areas still in extreme poverty despite the 60,000 Kwacha pension. Lusaka, December 2008 p. 30

However…. We must take care when interpreting these results: We use 2006 data, and 60,000 is likely to be worth more two years ago than it is today; It is unclear how prices and GDP will rise in the future relative to the assumptions made in the Social Budget; There is uncertainty over the future number of beneficiaries, and; Work is required on the likely effectiveness and costs of delivery. Further analysis is required to determine the likely impacts of a chosen pension level; It is clear that a Universal Social Pension is the most appropriate policy in order to achieve a significant reduction in poverty for the most vulnerable aged 60 years and above. Lusaka, December 2008 p. 31 31

Key Findings Analysis by both the ILO and the Zambian Ministry of Labour and Social Security show that a Universal Social Pension is affordable: A pension higher than 60,000 Kwacha per month would be possible within an envelope of less than 1% of GDP. A Universal Social Pension would have an impact on those in extreme poverty in rural areas; The method of indexation chosen will have a significant impact on the long-term success of the policy in providing adequate income replacement for the elderly; The proportion of the population who will potentially receive a pension will be low - less than 5% of the total population: So this the first step in providing adequate social protection to all. Lusaka, December 2008 p. 32

Further analysis of the Universal Social Pension is needed; The Way Forward Further analysis of the Universal Social Pension is needed; For example, more analysis on the appropriate benefit level; Further work on how the pension is indexed, and; More detailed analysis on the policy’s impact on poverty. Lusaka, December 2008 p. 33