The impact of a minimum pension on old age poverty and its budgetary cost. Evidence from Latin America

This paper examines the impact on old age poverty and the fiscal cost of universal minimum old age pensions in Latin America using recent household survey data for 18 countries. Alleviating old age poverty requires different approach from other age groups and a minimum pension is likely to be the only alternative available. First we measure old age poverty rates for all countries. Second we discuss the design of minimum pensions schemes, means-tested or not, as well as the disincentive effects that they are expected to have on the economic and social behavior of households including labor supply, saving and family solidarity. Third we use the household surveys to simulate the fiscal cost and the impact on poverty rates of alternative minimum pension schemes in the 18 countries. We show that a universal minimum pension would substantially reduce poverty among the elderly except in Argentina, Brazil, Chile and Uruguay where minimum pension systems already exist and poverty rates are low. Such schemes have much to be commended in terms of incentives, spillover effects and administrative simplicity but have a high fiscal cost. The latter is a function of the age at which benefits are awarded, the prevailing longevity, the generosity of benefits, the efficacy of means testing, and naturally the fiscal capacity of the country.