Redistributive pensions in the developing world

• Date: 01 May 2019
• DOI: http://doi.org/10.1111/rode.12582
• Author: Achim Kemmerling,Michael Neugart
• Published date: 01 May 2019

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wileyonlinelibrary.com/journal/rode Rev Dev Econ. 2019;23:702–726.

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INTRODUCTION

Redistributive pension schemes have seen a remarkable surge in developing countries (Pallares-

Miralles et al., 2012; ILO, 2014). To a large extent, this surge is due to the rise of so-called

social pension schemes (Leisering and Barrientos, 2013; Holzmann et al., 2009). Social pensions

are non-contributory pension schemes financed by taxation, and are (usually) targeted towards poor

people above the retirement age. In the last decades the number of developing countries in which

DOI: 10.1111/rode.12582

REGULAR ARTICLE

Redistributive pensions in the developing world

AchimKemmerling1

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MichaelNeugart2

1Willy Brandt School of Public

Policy,University of Erfurt, Erfurt,

Germany

2Department of Law and

Economics,Technische Universität

Darmstadt, Darmstadt, Germany

Correspondence

Michael Neugart, Department of Law

and Economics, Technische Universität

Darmstadt, Darmstadt, Germany.

Email: neugart@vwl.tu-darmstadt.de

Abstract

Redistributive so-called social pension schemes have seen a

remarkable surge in developing countries. These schemes

often target the rural elderly and correlate with urbanization

rates, urban rural-wage differentials, and family norms. We

use this stylized evidence to motivate a political economy

model for a Beveridgean pension system with trade-offs be-

tween four groups: the (poorer) rural old and young, and the

(richer) urban old and young. We show under which condi-

tions governments will install a pension system and increase

its generosity as the share of the urban population rises, pro-

ductivity differentials between urban and rural workers

widen, or the social norm erodes. Our conclusion is that the

role of the rural–urban divide in shaping redistribution mer-

its more scholarly attention, as the gap between cities and

the countryside widens in many developing countries.

PACS

H55, D72, O18

KEYWORDS

crowding out, developing countries, electoral support, family transfers

pensions

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Kemmerling and neugart

such pension schemes have been introduced has more than tripled (see Figure 1). It is noteworthy

that these pension schemes, by and large, not only redistribute between generations but also within

generations. This makes them different from many of the social security systems of developed coun-

tries and also from individual pension accounts in developing countries (Lindert, 1994; Perotti and

Schwienbacher, 2009).

In this article we offer an explanation for the emergence of redistributive pension schemes and the

increase in their generosity in the less-developed world. We build a political economy model of a social

security system of the pay-as-you-go type. We show under which conditions a government will be willing

to install a pension system and increase its generosity as the share of the urban population increases, urban

to rural productivity differentials rise, or the social norm driving family transfers to the elderly erodes.

Governments are more inclined to introduce a redistributive public pension scheme and increase its

size if such a policy reform finds electoral support. Increasing taxes on the income of the working pop-

ulation in order to provide for old-age security may affect societal groups differently. In our approach,

we focus on four groups in society that are significant for these kinds of policy reforms in developing

countries. Generally speaking, there is a divide between urban and rural citizens, with significantly

higher wages being earned in urban areas. Furthermore, this divide in the (young) working population

is mirrored in the well-being of the older population, which in developing countries still depends to a

large degree on transfers paid by younger family members. As the public pension schemes that have

been introduced or enlarged recently do not only transfer between generations but also redistribute

within the younger generation, a conflict of interest as to the size of such a public program arises

between those living in high-paying urban areas and the rural population. Moreover, if public pension

FIGURE 1 The diffusion of social pensions

Sources: Holzmann et al. (2009) and own compilation. [Colour figure can be viewed at wileyonlinelibrary.com]

020 40 60

No. of Countries

1980 1990 2000 2010

Year

Latin America Africa

seirtnuoC noitisnarTaisA

Global Spread of Social Pensions