PensionReforms' summary and comments
This report, co-authored by one of PensionReforms' contributing editors, looks at the pension options available to Sri Lanka.  Despite the country's relative poverty and underdeveloped tax collection framework, a universal pension seems the best way to tackle Sri Lanka's existing (and potentially large) poverty amongst the old.

"Sri Lanka's population is ageing rapidly.  Residents over 60 years of age comprise 9% of the population and will reach 25% by 2041.  The existing pension system in Sri Lanka is unable to guarantee a minimum income for older people to prevent them from living in poverty.  Coverage of pensions is small - probably no more than 10% to 15% of the population have access to any form of pension scheme - and, most pension schemes provide benefits that are well below the poverty line.  Even if existing pension schemes were to be improved, they would still be unable to provide income security for the vast proportion of the older population."

Sri Lanka faces a familiar collection of problems that are common to all poorer countries:
-   high levels of poverty;
-   a large 'informal' economy;
-   an undeveloped financial infrastructure.

The report suggests the best way of addressing old-age poverty is that every older person "upon reaching a specific age - receives a basic pension to keep them out of poverty."  .

"Universal pensions can play an important role as the foundation pillar of a broader pension system, upon which other pension pillars can be built, whether they be mandatory or voluntary contributory schemes.  Universal pensions have significant advantages over means-tested pension schemes which are much less effective in reaching the poor and create a series of perverse incentives, including discouraging people from working in old age.  Means-tested pensions can also undermine contributory pension schemes by discouraging people from saving for old age.  Universal pensions create no perverse incentives and provide a solid basis upon which to establish a system of contributory pensions."

The usual objection to a universal pension (its high cost) does not withstand analysis, according to the report.  Both the State Pension Age and the annual amount payable are the two key cost drivers and they can both be adjusted to produce a system that is affordable.

"The study proposes a level of cash benefit for a universal pension in Sri Lanka at the national poverty line, currently around 2,950 rupees (US$27) per month. This would provide older people with a benefit that is approximately three times as large as those offered by the most generous informal sector contributory schemes.  The study estimates the cost of a pension for four qualifying ages: 60, 65, 70 and 75 years.  Calculations also include the costs of administering the schemes and providing a funeral benefit equivalent to three months of pension benefits."

Estimates of the costs of the proposed scheme for the possible State Pension Ages are as follows:
-   age 60: 1.8% of GDP;
-   age 65: 1.2% of GDP;
-   age 70: 0.8% of GDP (the recommended State Pension Age);
-   age 75: 0.4% of GDP.

If a State Pension Age of 70 were adopted, based on 'trend growth rates', the future cost would be expected to fall to 0.6% of GDP by 2041: "If however, growth of per capita GDP were to fall to 1.8% per year [from 3.6%], the fiscal burden of a universal pension would increase, but only modestly, rising to 1.1% of GDP for everyone over 70."

Paying for the pension is not without challenges in Sri Lanka as most citizens do not pay income tax.  The report looked at the options and suggests that a broad base is important given the proposed scheme's universality.

"Consumption taxes are one option in Sri Lanka. The study indicates that a small increase in VAT and excise duties could provide sufficient funding to finance a universal pension. For example, an increase in VAT of 5% to 5.5% (along with similar small increases at higher levels of VAT) would pay for a pension for everyone over 70 years."

Because a universal pension is the simplest of all to administer, the report does not envisage any difficulties in establishing the administration framework.

"A universal pension set at the poverty line is likely to transform the lives of older people and their families across Sri Lanka. It will almost certainly be politically very popular with citizens and could play an important role in building social cohesion and strengthening the social contract between the state and people from all ethnic backgrounds."

PensionReforms agrees: the advantages of a universal system seem so much easier to see in a country where there is nothing much there now and no financial infrastructure to support even the most basic alternative.  If poverty amongst the old is the issue, why not address it directly?  And, while there may be a philosophical justification for denying the pension to those who don't really need it, there seem significant administrative and political reasons for paying such a modest amount to everyone.

The report suggests that the proposed universal pension does not prevent other pension Pillars from being added, ".whether they be mandatory or voluntary contributory schemes."  PensionReforms understands the need to be inclusive but, if the Sri Lankan government adopts the report's recommendations and if they resolve the pensioner poverty level, there seems to be no real reason for the government to worry about what citizens might do for themselves privately.  And, if the recommendations do not resolve the 'poverty in old age' issue, increasing the flat, universal pension would seem the most direct way of fixing that.  (File size 1.44 MB; 50 pp)  264

At the link, look for the report: Tackling poverty in old age: a universal pension for Sri Lanka