Discussion Papers on Social Protection
Old age protection for informal workers – feasible or too far away?
By Matthias Meißner
Introduction
In developing countries more than 900 million workers can be considered informal – they represent more than half of all jobs in the non-agricultural sectors.The estimates rise to some two billion people if agricultural workers in developing countries are included (OECD 2009).The phenomenon of informality seems to come up everywhere: in all institutional or business sectors, in all age groups, in all social classes, say: in the whole society. Because of this, it is a huge challenge to describe it comprehensively and to understand its characteristics. But in contradiction to the prevalence of informal sector work and informal employment it very often remains a non-tackled issue from policy perspective.This applies also for specific social protection policies or for old age protection of informal workers.
But what do we mean when we talk about informal sector and informal employment? The starting point of each definition is different. The informal sector is broadly characterised as comprising production units that operate on a small scale and at a lowlevel of organisation, with little or no division between labour and capital as factors ofproduction, and with the primary objective of generating income and employment for the personsconcerned. Operationally, the sector is defined on a country specific basis as the set ofunincorporated enterprises owned by households which produce at least some products for themarket but which either have less than a specified number of employees and/or are not registeredunder national legislation referring, for example, to tax or social security obligations, or regulatory acts (cp. UNSTATS). In contrast, the definition of informal employment ties up with certain modes of employment. Informal employment refers to jobs or activities in the production andcommercialisation of legal goods and services that are not registered orprotected by the state and, accordingly, are not covered by the social security system(cp. OECD 2009). Usually, informal employment comes up in any institutional sector, not only in the informal sector.
To a certain extent, we find informal employment for example also in the public sector or in registered enterprises.In order to simplify matters, the term informal workerswill be applied in this paper.It shall describeall informally employed in any institutional sector.
Anyhow, it is a huge challenge to provideeven basic social services, labour rights or work safety to informal workers. Usually, they do not have a written labour contract and limited access to social protection. Pensions are usually directly deducted from the salary. The administrative burden of a monthly payment can therefore be very cumbersome for the informal worker. So why think about old age protection? It seems to be far away from reality. But the time is now to think about and to start as this paper will demonstrate. In many developing countries we recognize a fast aging society. This demographic transition is caused by a downward trend in fertility coupled with an increase in life expectancy (cp. UN 2013). Furthermore, the traditional model of joint families is being eroded. Young people and young couples are migrating from rural areas to cities, leaving their parents to cope on their own. In contrast to developed countries, the fast aging society in developing countries meets rather fragmented and underdeveloped social protection systems. This is a precarious mixture and poses a huge challenge.This paper will go on with a short overview regarding the demographic and social challenges in selected South and Southeast Asian countries. Afterwards, different approaches for old age protection of informal workers– amongst others from GIZ projects in India, Vietnam and the Philippines – will be presented and discussed.[1] Not all approaches seem to achieve broad coverage of informal workers. Theyrequire further efforts regarding implementation, data collection and analysis as will be pointed outat the end.
Aging societies also in developing countries
The fast aging society poses a huge challenge for many South and Southeast Asian countries. Vietnam, for example,has an estimated population of around 92 million with an annual population growth of 1.03%. The Total Fertility Rate (TFR[2])decreased from 5.25 in 1975 to 3.8 in 1989 and to 2.03 in 2009. Indeed the population is still young as the median age is 28.7 years and nearly one quarter of the population is aged 0-14 years (cp. CIA). But resultsfrom the population projections by the General Statistics Office for the period 2009-2049 indicate that the percentage of the elderly aged 60 and over will triple in that period (from 8.69 to 26.10 of the total population). Vietnam started its aging phase when over 60-year-olds accounted for more than 10 per cent of the total population in 2012, five years ahead of prediction. The country’s fast aging process poses a serious long-term problem as the ongoing discussion about ‘getting old before getting rich’ points out. Currently, there is a total labour force about 53.9 million people (aged 15 and above), and an effective unemployment rate of 2.22%. But in 2012, only 10.4 million workers were enrolled in compulsory social insurance, less than 20% of the total workforce (ILO 2013). Informality is the norm, not the exemption. Both, compulsory as well as voluntary social insurance isunderperforming massively.
We see a similar picture in Indonesia: Only 13% of the Indonesian workforce participates in any old age security system while the country is undergoing a significant demographic change. Indonesia has an estimated population of more than 251 million peoplewith an annual population growth of 0.99%. Its TFR declined from 5.5 births per woman in 1970 to 3.1 in 1990 and to 2.2 in 2013 (estimated). At the same time, life expectancy increased from 52.5 years in 1980 to 59.8 years in 1990 and to 70.5 years in 2008. The population is still young as the median age is 28.9 years and more than one quarter of the population is aged 0-14 years (cp. CIA). But with an estimated number of more than 70 million elderly people in 2050, the population aged 60 years or above will more than triple – an increment of growth that is higher than the average in Asia and the world.
India has an estimated population of more than 1.2 billion and an annual population growth of 1.28%. The median age is only 26.7 years and nearly 29% are in the age group from 0-14 years (cp. CIA). The TFR declined from 4.7 in 1979 to 3.3 in 1997 and2.55 in 2013 (estimated). The percentage of elderly people (60 upwards age group) is expected to rise from 8.3 % in 2013 to 12.4 % in 2026 and to 18.3 % in 2050 (GIZ 2013). It will more than double. Currently, more than 90% of the labour force works in the unorganised (informal) sector and the large majority of these workers do not have adequate social security or old-age protection.
The demographic window – when the share ofchildren in a population falls permanently below 30% and the share of olderpeople is still less than 15% - only staysopen for a certain time. This limited time with fewer dependent children and a small share of older dependents may cause ademographic bonus, as it can result in higher productivity, savings and wealth for the working population. This is the best time to implement (social) insurance or savings schemes. After a certain time, the demographic window closes again, as the population ages and the dependency rates increase. The demographic window is still open in Vietnam, Indonesia and India (GIZ 2013a). In other developing countries, such as Nepal, Cambodia and the Philippines it will open in the next years.So the time is now to take certain steps regarding social protection and in particular regarding old age protection. Only in this manner the demographic bonus is turned into ademographic dividend, which means that the demographic bonus will pay off for the future generation. But the key question is how to start and how to deal with the huge number of informal workers in developing countries.
Experiences from South and Southeast Asia
In the last years, increasingly new and innovative micro-insurances as well as micro-savings products were developed and tested in several developing countries (covering different risks such as death, sickness, crop-failure or old age).They pose a counter concept to traditional approaches, such as social pensions, which are usually government-funded and tax financed. Currently, there are more than 100 social pension schemes running across the globe in low, middle and high-income countries (cp. HelpAge International). In the following different approaches from South and Southeast Asian countries incorporating some innovative design elements, such as government subsidized micro-insurance schemes, will be presented and discussed.
Micro-pensions with public subsidies in India
In January 2004, the Government of India established theNational Pension Scheme (NPS) and extended it to informal workers in 2009, the National Pension Scheme for informal workers (NPS-Lite). It is a voluntary defined contribution scheme that works through a group-based approach. Microfinance institutions and others (called aggregators) administrateindividual contributions by informal workers.
Furthermore, the central Government haslaunched an incentive scheme in order to encourage people from the informal sector to voluntarily save for their retirementand to lower the cost of operations of the New Pension Scheme. This top-up for NPS beneficiaries is calledSwavalamban. It was initially announced for three years for the beneficiaries who enroll themselves in 2010-11. It now has been extended to five years for the beneficiaries enrolled in 2010-11, 2011-12 and 2012-13 (cp. Press Information Bureau 2014). In the scheme, the Government will contribute a sum of INR 1000 (around 16 USD) to each eligible NPS subscriber who contributes a minimum of INR 1000 and a maximum of INR 12000 (around 193 USD) per annum. It is open to eligible citizens of India in the age group of 18–60 years. Subscribers are free to choose the amount of the contribution. The scheme provides transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust. It is designed to ensure very low administrative and transactional costs. Furthermore, subscriber can operate their account from anywhere in the country, even in case of a change of their location, their employment or their aggregator. In this manner, portability in the whole country is achieved. Around 2 million beneficiaries have registered until August 2013 (Mukul Asher 2013). This is 0,5% of the around 400 million workers in the unorganised sector in India.
In India, GIZ on behalf of German Federal Ministry for Economic Cooperation and Development (BMZ) carries out the Indo-German Social Security Programme (IGSSP). It provides policy advice and technical support in order to improve old age income security by means of livelihood support and improved access to social security benefits (cp. GIZ 2013). The programme cooperates, amongst others, with the Ministry of Finance, the Ministry of Labour and Employment (MoLE) and the Ministry of Rural Development. It includes policy advice, pilot initiatives and coordination of stakeholders in introducing pension products.
IGSSP supports the above mentioned ministries in developing acomprehensive social security scheme for the informal sector, including old age pension, health, life andaccident insurance. A study showed that a combined product seems to be more attractive to beneficiaries than a single pension claim.On account of thisthe Government of India is considering to develop a comprehensive social security product for informal workers.
Self-help groups in India
In cooperation with the NGO HelpAge India, IGSSP is supporting a pilot project for social protection of the elderly (GIZ 2013). It is implemented in the state of Bihar, where elderly women and men are mobilised to form groups, the so-called Elderly Self-Help Groups (ESHGs). They are supported with a small amount of seed money. These self-help groups are an important approach to generate livelihood opportunities for its elderly members and to promote collective action. It turned out, that they can be a useful and efficient channel for disseminating information on social security schemes and regarding access to social insurance.
The ESHGs alsoprovide monthly or fortnightly savings opportunities. The generated funds are used for loans to group members (at an interest rate fixed by the group) and for investments intro micro-business ventures. In this manner, the elderly do not get dependent on local money lender who charges extortionate interest rates, sometimes up to 100%. With funding from also other organisations, 490 groups with more than 7500 active members have been formedtill date(GIZ 2013). A total of more than INR 14.86 million (USD 1.282) of savings isin circulation and is used to give loans to members. GIZ is striving for the expansion of the model to other states in India.
Commercial insurance in India
Also in India, the social enterprise Invest India Micro Pension Services (IIMPS) encourages and enables informal sector workers to accumulate micro-savings for their old age (cp.Invest India Micro PensionServices Private Limited 2014). It waspromoted with capital from different stakeholder, amongst others from the German KfW Development Bank. IIMPS provides several financial services in collaboration with national and regional banks, microfinance institutions, employers, self-help groups, NGOs, cooperatives, workers associations and unions. IIMPS is now also part of NPS (as a so called aggregator) and they partly invest the money in the NPS scheme.
By means of its micro-pension model and its partnership network, IIMPS wants ‘to enable millions of low income workers with modest savings to access customised pension and insurance products in a secure, affordable, convenient and well regulated environment’ (cp. Invest India Micro Pension Services Private Limited 2014).Currently, around 680,000 people from urban and rural areas (in over 100 districts of 14 States of India) save for their old age in line with IIMPS.
Flexible micro-insurance and micro-savings in Indonesia
In the last years, the Government hasstarted several efforts to enhance old age protection, including saving for formal and informal workersthrough PT Jamsostek-scheme, the access of older peopleto social services and day care, as well as the access of all Indonesiancitizens to social security. The coreprocesses are to further develop the existing law, to supportinstitutional reforms at all levels and to design an effectiveincome support system. Institutional reforms at all levels accompanied the legalprogress, such as decentralisation policies, capacity building oncentral, district and local levels and the creation of a PovertyReduction Committee.
PT Jamsostek launched a pilot project in order to open the social security programme to informal sector workers. The program provides health insurance, work accident insurance, life insurance and old age savings and is targeted at informal sector workers (ILO 2012). Contributions are set at 0.3% of income for life insurance, 1% of income for work accident, minimum 2% of income for old age savings, while health insurance contributions are set at 3% of wage for single workers and 6% of wage for workers with families.The respective income is set at the minimumwage of IDR 1 million per month(with variations across the provinces). The lump-sum benefit consists of the accumulated contributions and the return on theinvestment.
The number of members constantly changes, as members can sign in and out of the programme anytime. From 2006 to 2009 there were around 223,000 members. In 2010, theprogramme hadaround 180,000 members. At least, approximately 400,000 members were covered from one of the fourprogrammes.There are some challenges for theJamsostek programme: In most cases members do not continue their membership after the subsidized pilot phase ends and many workers lack information and guidance on how to enroll (cp. ILO 2012). Furthermore, there is only limited human and technical capacity to reach and to provide services to workers in remote areas.
The same applies for Askesos, a subsidized income replacement scheme for informal sector workers, which provides
cash benefits to members in case of sickness, work accident
or death (cp. ILO 2012). The programme covers only a very small part of the informal economy workers and the benefits are small. The death benefit is from IDR 400,000-800,000 (USD 34 – 69, depending on the period of membership). In case of work accident, members receive IDR 300,000 (around USD 26). But members can only claim one benefit per person and year.In 2011, the Askesos scheme covered 358,000 members andwas administered through 1,790 social organisations in 33 provinces. The new Askesos programme which was launched on a pilot basis in 2012 aims to meet the challenges and is administered by Jamsostek.
In Indonesia, GIZ on behalf of BMZ gives advice to the National Development Planning Agency (BAPPENAS) in the overall design of the social security reform process and the associated institutional coordination.
Social pension pilot programme in Indonesia
The non-contributory minimum pension programme, managed by the Ministry of Social Affairs is called Jaminan Sosial Lanjut Usia (JSLU). Itprovides cashtransfers to themost vulnerable elderly, such as the elderly poor, who do not receive support from other programmes. The amount of the minimum pension is IDR 300,000 (around USD 25) per month, which is on average above the povertyline. The programme covered only around 13,500 beneficiaries in 28 provinces in 2011 as the number of beneficiaries depends on the available funds from the central level. In contrast, the estimated number of the vulnerable elderly is around 1.7 million. It had positive effects as the money was spent on food, health and family support. Because of this, the Governmentis exploringhow to expand the programme.
The Ministry of Social Affairs also provides subsidies to old people’s homes called Panti Sosial Tresna Wredha. The programme pays IDR 3,000 (around USD 0.25) per person per day to these homes. But this subsidy is too low to cover even the daily food expenditures. Because of this, some provinces have initiated additional programmes in order to bear the full cost.
Regulatory Frameworks and micro-savings in the Philippines
In the Philippines, GIZ (on behalf of BMZ)works on Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia). Its objective is to support consumer protection measures in particular in the field of micro-insurances, further assistance in the dialogue process and the information dissemination campaign for the alternative dispute resolution for micro-insurance. Certain procedures have been designed for commercial insurance companies, for mutual benefit associations and for cooperative insurance societies.