Extending Coverage through Noncontributory Social Insurance

not normally used to provide income security in old age, perhaps partly because of a lack of appropriate savings instruments. There is clearly room to introduce innovative contributory schemes for the less poor segment of the informal sector.

Among poor informal workers, by contrast, contributory schemes are either not feasible or not attractive. The informal workers in the lowest three quintiles of households consist mostly of paid employees in elementary occupations and some cultivators. These people own few assets besides residential housing and a little land. Their households are therefore unlikely to be able to accumulate substantial savings for old age. This groups need to be targeted by noncontributory pensions or social pensions. All countries in the region have social pension systems. The expansion of these systems is possibly the only option for reducing old-age poverty among a large group of informal workers. However, in the absence of alternative solutions, the size of these programs may end up being too large; the associated fiscal costs would be too high; and the programs may not address informality at large scale because of the low incentive to assume the costs of formal sector jobs.

Given the heterogeneity in income levels among informal workers, the chapter proposes that undertaking various approaches would help ensure adequate resources to provide long-term income support for lower and higher income quintiles. The following section discusses the potential to expand noncontributory social insurance in the region because this is the only way to reach workers with low or no capacity to contribute. The main conclusion of the section is that such an expansion may be too costly if it is not targeted, and, even if it is targeted, the benefits need to be restrained to be fiscally sustainable and not discourage formalization. The section entitled “Expanding Social Insurance to Higher-Income Informal Workers” examines the potential to integrate higher-income informal workers into existing contributory social insurance. The international experience teaches that this is possible and that simplification and lower costs may produce some modest impact. The section analyzes the potential of long-term savings for higher income workers in Pakistan.3 Data from household surveys for that country confirm that there is space for such expansion, provided that incentives and institutional enabling conditions are also met. The section entitled “Policy Implications” explores the possibility of generalizing the conclusions of the preceding section to the rest of the South Asian countries. In the absence of comprehensive household survey data, the chapter uses indicators from Findex to infer enabling conditions in the region and concludes that three of the countries will likely meet those conditions, under similar enabling environment (annex 8C).4

The expansion of noncontributory social insurance to provide all informal workers with retirement and the coverage of other long-term social insurance risks would require enormous fiscal efforts and is not recommended. Although noncontributory pensions play a necessary role in providing income security in old age for the poorer informal, fiscal constraints will limit both the size of these kinds of pensions and the age to be