Cash Transfers Cornelia Mihaela Tesliuc Social Safety Nets Core Course February 26, 2008 1

Cash Transfers: Summary Sheet Needs Based transfers (which include food stamps), non-contributory pensions, family allowance Intended Beneficiaries Poor working families Those not expected to work – children, the elderly, disabled Those needing temporary relief Targeting Methods Means and proxy means and/or Categorical: children, old, disabled, etc. Key Design Features Good administration for selection of beneficiaries and cash/food stamp distribution Distribution and reclamation chain for food stamps Advantages Have lower administrative costs than many other programs Do not distort prices Transfers can directly meet critical household needs Benefits can be differentiated by level of need, household size or composition, etc. Disadvantages Targeting methods can be information intensive Transfers are fungible, subject to unintended household uses Appropriate Context Essential commodities available on the private market 2

Outline What are cash transfers? Types of programs How important are they? Pros and cons When are cash transfer appropriate? Design considerations 3

A word of caution on terminology Universal versus targeted programs The only universal SSN program is subsidies – all individuals can benefit All other SSN programs, including “universal child allowances”, are targeted. Targeting method: categorical / demographic Cash transfers may be conditional or unconditional “Conditional transfer” refers to the requirement that some condition must be fulfilled by the recipient in order to receive the program transfer, such as workfare or human capital investment “Unconditional” DOES NOT mean “universal” 4

Types of cash transfer programs Cash transfer programs provide cash or near-cash assistance to the poor and certain deserving or vulnerable groups. Objective: Increase the incomes of the poor; facilitate government reforms; protect the poor from shocks. Type of programs A. Needs-based social assistance programs B. Social pensions: noncontributory transfers to offset the risks of old age C. Family allowances D. Food stamps E. Tax Credits 5

A. Need-based Social Assistance Programs Common in OECD, Central and Eastern Europe, the former Soviet Union, and some Latin American countries. Aimed at chronic poor Government funded May be guaranteed minimum income program, or last-resort social assistance program Involve some sort of means-testing (income and asset testing for GMI, proxy-means testing for last-resort) Income threshold: may be linked to average or minimum statutory wages, or minimum cost of living 6

A. Guaranteed Minimum Income (GMIs) Examples: (most European OECD countries) Belgium; Bulgaria; Czech Republic; Estonia; Finland; France; Germany; Hungary; Romania; Slovakia. Targeted cash assistance that guarantees a minimum for households below an income threshold; A safety net for the poorest, aims to cover the bottom 5-10% of the population. In practice, most cover less than 5%; Complementary to other social protection (pensions, unemployment benefits, family allowances); Benefit levels are generally equal to the difference between monthly hh income and the threshold, but vary according to hh size; Targeting based on income and asset testing by social workers through social welfare offices; Common in the new EU states, which introduced GMIs following the collapse of full employment under socialism; and OECD countries

Example: Bulgaria Guaranteed Minimum Income Basic design features Target group Poorest 10% Targeting method Income and asset test Eligibility criteria Income, assets, family composition Eligibility rules Nationally determined Financing Central budget 100% Implementation Deconcentrated units of the line ministry Benefit level ~28 Euro ( June 1, 2005) Varies depending of the applicant’s earned income Benefit formula GMI Treshold – Total income of the family 8 8

Spending on GMIs in EU and Transition economies In 2003/2004, the spending on GMIs in EU25 countries ranged between 0 (few countries which at the moment did not have such a scheme) and 0.8 percent of GDP, with an average of 0.2% of GDP. 9

GMIs Outcomes in selected countries Coverage – percentage of persons covered in each quintile Targeting – percentage of funds going to each quintile Adequacy – share of beneficiaries’ consumption covered by the benefit Bulgaria, Estonia, Lithuania, Poland, and Romania Means tested income support are residual programs Spending around 0.2% of the GDP on these benefits 10

GMIs Outcomes (cont’d) 11

B. Social Pensions Examples: Australia, New Zeeland Canada South Africa, Namibia, Mauritius, Botswana India, Bangladesh Nepal Bolivia, Chile, Argentina, Costa Rica, Uruguay, Brazil Designed to offset old-age poverty risk, for those above age 65 who: Incomplete employment history Informal sector workers who prefer to stay outside contributory system Lifetime poor Funded mainly from general revenues, social insurance fund or payroll surcharge Benefit: ranges from 14% to 36% of average wage Setting appropriate benefit level If high relative to minimum contributory undermines incentives to contribute (Uruguay case) If too low, won’t contribute to poverty alleviation, admin costs become large share of total (Argentina, Turkey) Total cost can vary: 70% of poverty specific threshold to those 65+ in 15 African countries ranges from 0.7% of GDP in Madagascar to 2.4% in Ethiopia (Kakwani and Subarrao, 2004) 12

Social Pension Examples Chile: shifted from a social-insurance to a mandatory private insurance system in 1983. Govt. fully funds a minimum social pension (equivalent to $39/month) as a “bottom tier” of the privately funded system to men >65 and women>60. Covers abound 8-10% of pensioners. Bangladesh: Govt. funded; community targeted means-tested social pension for low-income >57 years persons. Provides Taka 120/month ($2). 13 13

Social Pension Brazil and South Africa example Factors behind the development of development of non-contributory pensions Government committed to expand welfare Explicit redistribution from urban to rural to reduce migration Cash transfers to poor older people politically acceptable because less likely to create work disincentives Social pensions seen as instrumental in reducing social unrest

Social Pension Brazil and South Africa example Impacts South Africa Incidence of poverty (at 1$/day) would have been 40% rather than 35% in the absence of pensions (Case and Deaton, 1998) Health status of children and older people were higher in benficiary HHs (Case 2001) Enrollment rates of school age children higher among pension beneficiary households (Duflo 2003) Brazil Increased access to credit (electronic banking card used as proof of creditworthiness (Schwarzer and Quero, 2002) Use part of pensions to purchase seeds and agricultural tools (Delago and Cardoso, 2000) Enrollment rates of school age children higher among pension beneficiary households (Carvalho 2000)

C. Family allowances Offset child raising costs (32-45% of LDC population are kids compared to 15-18% in higher income nations). Easy to identify beneficiary families Can be pro- or anti-natalist Wide child age eligibility range (<3 to <21) Often a flat-rate benefit, birth grant and other allowances provided Recent trend: targeting, mean-testing and higher benefits for the poor and for unwed mothers Higher benefits accorded to families with children with special needs Examples: Most OECD European countries Central and Eastern Europe, Former Soviet Union countries South Africa Argentina 16

Example: Family allowance The South African Child Support Grant Introduced in 1998 to replace the state maintenance grant. As of 2006, the program provides a monthly grant of R 190 (about US$27) to 7.1 million poor children younger than 14. 65 percent of all the children in South Africa live in families that would qualify for the program and 80 percent of these actually participate into the program. Take-up rates were lower when the program first started because of the difficulty of getting documentation for children and caregivers. The government made substantial efforts and was able to increase the participation of poor children in the program, but some work remains to be done to reach those poor families without proper documentation

The South African Child Support Grant, cont. Implementing agency: the South African Social Security Agency, separate government agency Eligibility: documentation to demonstrate primary responsibility for care giving, proof of age, official proof of employment and income of the applicant and spouse Payment of benefits: managed and monitored at national level and disbursed by third party contractors at provincial level Low administrative costs Impact: program linked to reduction in poverty, higher labor market participation, and increase in school attainment.

D. Near Cash: Food Stamps Food stamps, vouchers or coupons are cash-like instruments that can be used to purchase food at authorized retail locations The value of the stamp is backed by gov. commitment to pay Amount of transfer based on the gap between the amount spent on food and the amount needed to acquire a minimum food basket Some programs restrict HHs to buy only a few specific foods or they may allow them to purchase any food Examples: United States Honduras Sri Lanka Mexico Colombia Jamaica (until 2002)

Tax Credits (TCs) Examples: Income support provided through the tax system for those who work and fill an income tax statement. People with earnings below a set level of income pay negative tax (e.g. receive a transfer) on the shortfall of their earnings below the threshold; Can take the form of a cash benefit (UK), and/or as a reduction in the amount of taxes paid or withheld from earnings (US, Netherlands); May be accompanied by other assistance, including credits for child care and housing (UK, NZ are focused on family support); Preconditions are a global income tax; personal ID #s; small informal sector (no TCs exist in high informality EU countries (Greece, Portugal). Examples: US: EITC; UK: Working Families Tax Credit; NZ: Working for Families; Netherlands: Tax Credit; Ireland: Family Income Supplement; Australia: Family Tax Benefit Canada: Child Tax Benefit.

GMI (monthly cash allowances) Different cash transfer programs often weave a comprehensive SSN: example from Bulgaria Targeted Social Assistance Programs GMI (monthly cash allowances) Heating allowances Child allowances General objectives –poverty alleviation: (а) to assist citizens who are not able to satisfy their basic living needs on their own; (b) social reintegration of beneficiaries; Specific objectives: to add up to the incomes of poor persons and families up to a legally defined threshold; to stimulate an active behavior (work requirement); to contribute to the social integration of beneficiaries (link to other services). to guarantee minimum heating for low income groups of population in winter season. to encourage low-income parents to bring up their children; to stimulate children to go to school. Targeting method Means test combined with the category approach (filters) Eligibility criteria Centrally determined. income, family size, age, labor and health status of applicants and their family income status of families and enrolment in school Type of financing Based on the principle of national solidarity: Financed from general revenues from taxes.

How Important are Cash Transfers? Level of spending Coverage of the poorest Generosity (level of benefit) 22

How Important are Cash Transfers? Spending on Social Insurance and SSNs 23

How Important are Cash Transfers How Important are Cash Transfers? Coverage of the poorest 20% by SP programs in transition economies Coverage of the poorest quintile by Social Protection Programs Countries ranked in decreasing order by per capita GDP in 2000 PPP 24

How Important are Cash Transfers? Generosity: Need-based assistance 25

How Important are Cash Transfers? Generosity: Family allowances 26

How Important are Cash Transfers? Generosity : Social Pensions 27

How Important are Cash Transfers? Generosity : social assistance Transfers as a share of Total income/consumption, selected countries in Latin America Source: Linder, Shapiro, Skoufias (2006) Redistributing Income to the Poor: Public Transfers in Latin America and the Caribbean 28

Cash transfers: Pros and Cons Least-cost solution to reduce current poverty. Subject to price inflation Consumer decide how to use the cash to meet their needs Use might not be optimal (unintended use of transfers) – if not with women Do not distort prices Work disincentives Automatic stabilizers (guaranteed minimum income programs) Attractive to local elites –limited political popularity Benefits can be differentiated by level of need, household size, composition Implementation can be information intensive Low administrative costs Reduces fiscal discretion, contributes to expenditure creep 29

When is Cash Appropriate? To reduce current (income or consumption) poverty When transitory shocks (or reforms) trigger large welfare losses among the vulnerable When the vulnerable have either permanent or mobile access to financial facilities When food is too costly to transport, and is locally available. During emergencies when there is an adequate food supply. When the “demand” for health, nutrition and education services is insufficient (or the returns from child labor too high) for parents to improve children’s human resource development 30

When are cash transfers an inappropriate part of a safety net? Shallow financial markets (hard to move cash) When administrative targeting is not possible, hence self-targeting is the only option (no inferior cash) When supply of essential goods and services has been disrupted (wars, natural disasters) When programs aim explicitly to modify recipient consumption behavior (e.g. cash rarely given to substance abuse victims) When safety net is funded with in-kind contributions (e.g. food aid recipient countries) 31

Design Considerations Keep expectations reasonable (!) Program responds appropriately to risk and is fiscally sustainable Resources targeted to the needy/vulnerable Benefits are adequate Avoid undesired incentive effects (will be covered in a separate session) Transfers are gender inclusive Adequate administrative capacity Political support is sustainable 32

1. Reasonable Expectations Cash transfers don’t “solve” poverty or eliminate risk Some benefit leakage will occur Not all needy can be covered by any single program Urban-bias happens Number of programs typically expands when social protection systems are developed 33

2. Program is Sustainable Long-term sustainability Adequate budget available for annual total benefit outlays and administrative costs Threat to sustainability: insufficient budget to meet program objectives Arrears Discretionary, instead of rule-based allocation of benefits Partial payments Understaffing, which leads to greater leakage Ad hoc adjustment to inflation, erosion of purchasing power 34

2. Program responds appropriately to risk Estimating Transfer Costs: Needs-Based Program 35

3. Targeting: Beneficiary Selection and Exit Rules Other sessions will cover targeting in detail; No “perfect” targeting: Target groups typically receive 30-75% of direct benefits in cash transfer programs around the world; Cash transfers are better targeted than in-kind Entry and exit conditions must be well-known and be enforced: Must be a steady flow of expected entry and exits to avoid dependency and exploding costs 36

4. Benefits are adequate Generosity Incentive effects. Concerns over: Covered in a separate section Generosity measured by replacement-income concept or transfer-to-wage ratios Incentive effects. Concerns over: Reduction of the labor effort of beneficiaries Crowding out of private transfers (remittances, charity) Changes in savings and investment behavior Changes in attitudes (e.g. less motivation to acquire human capital) 37

6. Making Cash Transfers Gender-Inclusive Why? Female headed households may face greater risks Women may make better use of transfers Poverty payoffs to better women’s nutrition and empowerment shown to reduce half or more of infant malnutrition. How? Gender reviews to identify risks and legislative inequity Old-age pensions and family allowances tend to “self-target” women Legislative reform to provide equal access to welfare 38

7. Administrative Capacity to Deliver Challenges Political interference in staffing & investment Fragmented policy making and programs fragmented amongst many agencies Delays in processing claims Poor record-keeping Failure to explain the schemes to members and public Poor terms of service Excessively complex procedures and regulations Neglect of compliance, M&E and policy research functions Reform Options Establish professional criteria and staff certification boards Separate policy and operational aspects---contract out the later to social partners Consolidate and harmonize programs Central gov to prepare guidelines and local govs to prepare implementation rules Earmark funds for M&E, audit, and policy research Automation after basic systems in place 39

8. Sustainable Political Support New programs tend to start during a crisis but political interest quickly fades; Avoid changing structure of key programs to de-politicize the intervention; Analysis, information outreach and social partner consultation can help build political consensus and sustain support Programs with good M&E may gain and maintain support Political sensitization needed to avoid patronage in design, and conflict between assistance and development spending Universal or narrow targeting 40

Cash Transfers: Summary Sheet Needs Based transfers (which include food stamps), non-contributory pensions, family allowance Intended Beneficiaries Poor working families Those not expected to work – children, the elderly, disabled Those needing temporary relief Targeting Methods Means and proxy means and/or Categorical: children, old, disabled, etc. Key Design Features Good administration for selection of beneficiaries and cash/food stamp distribution Distribution and reclamation chain for food stamps Advantages Have lower administrative costs than many other programs Do not distort prices Transfers can directly meet critical household needs Benefits can be differentiated by level of need, household size or composition, etc. Disadvantages Targeting methods can be information intensive Transfers are fungible, subject to unintended household uses Appropriate Context Essential commodities available on the private market 41 41