Pensions and informality in a structuralist dual-economy model

Although labor informality prevents half of the working age population in Latin America from contributing to pensions, old-age protection expanded in the last decades thanks to non-contributory social pensions. However, the lowlevels of coverage and benefits in these programs, and the persistently high levels of informality, cast doubt on the future of old-age protection in the region. The purpose of this paper is to assess whether universality and sufficiency of pensions can be achieved through non-contributory schemes, in countries with a large informal sector. For this, I build a theoretical dual-economy model with a formal and an informal sector, two generations, three pension schemes, and a three-fold social response to the old-age protection deficit: informal work by the unprotected old, income sharing by their families, and social pensions by the government. It is shown that with a demand-led formal sector the government can set targets of sufficiency and universality through social pensions. This guarantees to the old the right not to work and reduces the burden on their families