1.8 The COVID-19 Lockdown Affected Informal Workers More

FIGURE 1.8 The COVID-19 Lockdown Affected Informal Workers More

Source: Calculations based on CmiE CPhS data. Note: The charts depict difference in differences event study estimates of the likelihood of employment among informal workers (panel a) and the self-employed (panel b) relative to formal workers. december 2019 is the baseline period. informal, self-employed and formal denote employment status as of december 2019. The dashed vertical lines depict the 95 percent confidence intervals of the estimates.

workers suggests that these approaches should be complemented with new interventions, such as introducing flexible, low-cost savings instruments for those informal workers who have some capacity to save. The lessons of this analysis are also relevant for other types of social insurance programs, such as those addressing unemployment or health shocks.

Five countries in the region run noncontributory pension schemes that target the elderly and are mostly means tested. For example, in Bangladesh the old-age social pension scheme targets old persons who do not receive any other governmental or nongovernmental allowance and whose annual income does not exceed Tk 10,000 (equivalent to US$120). The income ceilings and benefit levels vary across the region.

Simulations show that expanding the coverage and benefit levels of noncontributory schemes to cover the informal sector fully could become prohibitively expensive as the population ages. Keeping coverage rates and benefits constant, population aging alone implies a 200 percent to 300 percent increase in the total cost of these programs (as a share of gross domestic product) by 2050. A large expansion of noncontributory schemes may also cause incentive-related problems. As benefit levels rise and targeting thresholds become looser, such schemes could distort labor market choices.

Countries that have tried the alternate approach—simply extending contributory schemes designed for the formal sector to the informal sector—have experienced mixed results. Social security agencies and their programs were designed to reach a relatively small formal workforce and may lack the implementation capacity to scale up programs to the self-employed and the informal wage workers in a cost-effective and user-friendly manner.

Efforts to modify existing programs to make them more suitable for the informal sector have been relatively more successful. These cases, many of which are in Latin America, are characterized by simple enrollment processes, low costs, and the bundling of social insurance and other benefits to make the schemes sufficiently attractive to encourage informal workers and employers to join.

Some of the individuals in the missing middle of the informal sector in South Asia may have the capacity to save for retirement. A growing share of Pakistan households are accumulating sizable assets over the life cycle. In 2018, the median net worth of households headed by a 60- to 65-year-old was equivalent to 36.8 months of household consumption, almost twice the net worth in 2001. This accumulation (relative to a household’s monthly consumption) occurs at a comparable pace across urban and rural households from all but the poorest quintile of the population, perhaps in response to the forces of population aging and weakening family and village risksharing networks.

Chapter 8 concludes that households possessing the ability to save for retirement seem to lack access to suitable financial instruments. Nearly 80 percent of the wealth accumulated by age 60–65 consists of residential buildings, a comparatively illiquid and