- WB report looks at practical challenges in ensuring the same for the elderly and the informal sector
In recent years, South Asia has been beset with an unprecedented combination of negative shocks. In Sri Lanka, an economic crisis on the heels of the Covid-19 pandemic pushed approximately three million people into poverty. These impacts have been further amplified by the global fuel and food crises in the wake of Russia’s invasion of Ukraine, and they hit hard those who were already the most vulnerable, i.e. women, youth, and children.
These challenges are compounded by the need to create jobs for South Asia’s rapidly growing working age population, at a time when new technologies impact the world of work perhaps like never before. In this context, adaptive social protection systems are a key element of development strategies that aim to capitalise on the opportunities brought about by accelerating technological changes, whilst protecting the poor and vulnerable from the growing variety, frequency, and intensity of negative shocks.
This situation was explained in a recent report, titled ‘Rethinking Social Protection in South Asia: Toward Progressive Universalism’ which was issued by the World Bank (WB) Group. Concerning Sri Lanka’s situation, the report paid attention to social protection schemes available for the elderly and those in the informal sector, and also practical challenges in ensuring that they truly benefit the intended groups.
Social protection schemes for the elderly in SL
Noting that Sri Lanka’s population is the oldest in the region and is rapidly ageing, the report analysed the link between age related factors and social protection schemes available in Sri Lanka.
Pointing out that the country has a generous non-contributory, defined benefit, civil service pension scheme (a non-contributory pension plan is a retirement plan where only the employer contributes money towards the retirement benefits of the employees) that absorbs an increasing share of scarce fiscal resources, the report said: “Its Employees’ Provident Fund (EPF) covers almost a third of the labour force, but offers benefits at too young a retirement age to adequately smoothen the income from the work life into retirement. The lump sum distribution fails to support most retirees’ throughout retirement. There are three informal sector funds that face challenges of design, administration, and financing; they are defined benefit sectoral funds that offer ad-hoc parameters, which create considerable uncertainty for workers. Sri Lanka has one non-contributory, means tested, elderly-assistance schemes that offers small benefits to the elderly poor. Still, its coverage is broad for both elderly assistance and social assistance schemes.”
Adding that the recent economic circumstances have aggravated the challenges to old age income protection in Sri Lanka, it was explained that the cost of civil service pensions has increased dramatically over the past decade, and that the loss of employment during the pandemic may have reduced the number of EPF contributors and undoubtedly affected the EPF balances.
According to the report, Sri Lanka’s growing elderly population is a pressing concern: “Sri Lanka has an aged and ageing population. Population ageing has already started to increase the elderly population relative to the working-age population, and it will soon begin to reduce the size of the working age population, absolutely and relatively. Sri Lanka’s working age population will begin to decline in absolute terms in about 2025 and has already begun to peak. The population aged 65 and over was about 11.2% of the total population in 2020, and is projected to more than double by 2050, as will the old age dependency ratio. The demographic dividend enjoyed until about 2005 has ended, with the total dependency rate now increasing. The median age of the population increased from 27.6 in 2000 to 34 in 2020, and is projected to further increase to 41 by 2050.”
It explained that this situation suggests that an ageing working age population will have to support more and more elderly people, which in turn implies a growing importance of State-sponsored or State-managed vehicles for old age income protection for those who cannot work in their old age.
Pointing out that Sri Lanka’s labour market is substantially informal, the report added: “In 2020, about 62% of employed men and 50% of employed women worked in informal jobs. Many of those in the formal sector are also believed to have relatively short work histories, as they go in and out of formal sector jobs. Old age income protection must efficiently accommodate the large proportion of the labour force that has low and intermittent earnings and must have the institutional mechanisms to accommodate frequent job changes.”
Challenges
“The two key challenges of both the contributory and non-contributory schemes are coverage, fragmentation, and adequacy,” the report added.
Almost two thirds of Sri Lanka’s labour force has some form of retirement savings or insurance. About 16.6% of the labour force will receive a pension under the Public Servants Pension Scheme. About 17% will receive one under informal sector schemes. About 30% will receive a lump sum benefit under the EPF. Elderly coverage is estimated to be about 13% for the Public Servants Pension Scheme, and 15.6% for the informal sector schemes. The EPF covers about 2.5 million workers, or about 31% of the labour force. The report added that the EPF does not have a voluntary window for workers between jobs or those who are otherwise self-employed, and that as an employer based scheme, the self-employed and informal workers cannot access it and can only take part in the informal sector schemes.
“The EPF mandatory contributions, the payroll tax based design, and the employer based interface are not aligned with the characteristics of the many Sri Lanka’s workers who move between employers, move in and out of the formal labour market, or are informal workers for much of their work lives. The EPF’s overall defined contribution design and individual accounting systems offer an important and useful foundation for a broader universal pension savings scheme. The EPF and the Employees Trust Fund (ETF) operate on separate platforms even though there is substantial overlap between their respective memberships. This has the effect of increasing the transaction costs for small businesses that have to remit separate contributions through separate channels to two different agencies. Unlike the EPF, the ETF has a voluntary contribution window that can accommodate workers without labour contracts. The ETF has about 40,000 self-employed members. This window could be further expanded,” the report explained other challenges, adding also that the EPF provides a small lump sum benefit that is insufficient to cover the income-related needs and poverty related risks of the elderly and that since the benefits are provided as a lump sum, they provide no protection against longevity.
In addition, the report identified as challenges the EPF not having a voluntary window for workers between jobs or those who are otherwise self-employed, the design of the informal sector schemes being poorly aligned with the variability, the uncertainty of informal workers’ incomes, and the informal sector pension schemes providing low benefits.
The report further explained: “There is both fragmentation and duplication between the Samurdhi and the two elderly assistance schemes. Both the elderly allowance and the Pin Padi are insufficiently targeted at the poorest elderly, and the benefit amount may be insufficient for Sri Lanka’s poorest elderly. Thousands of qualifying beneficiaries for the senior citizens’ allowance have queued for the benefit, but only recently received it. The benefit is less than half of the poverty line income and may be insufficient to ensure the livelihoods of many poor elderly.”
Reform options
With such rapid ageing and severe fiscal constraints, the report noted, a reform vision is needed for Sri Lanka to increase private savings both for retirement and other risks during the life cycle. The aim should be to increase the mobilisation of workers’ savings for retirement, increase the labour force coverage of retirement savings schemes, remove the formidable barriers to labour mobility presented by existing schemes, and provide an income throughout retirement that is sufficient to smoothen consumption from the work life into retirement and protect the poorest elderly from destitution.
The EPF and ETF could serve as a foundation for a flexible National Pension Scheme to provide basic old age income protection for workers, whether formal or informal, the report said, adding that yet, achieving such a vision would require a number of measures for both the design and delivery of systems.
One measure concerns the scope of membership, regarding which the report said that membership should include all workers of any age on a voluntary basis, but should be mandatory for workers with wage contracts. Regarding benefit eligibility (by age), it was explained that since life expectancy has increased substantially, so too should the period during which workers in Sri Lanka contribute to the new scheme. The report recommended setting eligibility at age 65 for men and for women.
The report presented more recommendations: “Some withdrawals for life threatening illness, injury, or other severe economic shocks should be permitted. Current EPF rules for payouts for housing and health related procedures will need to be reviewed and potentially revised in acknowledgment of the trade-off between early withdrawals and pension benefit adequacy. Transition arrangements will be needed for individuals with accounts in the informal sector funds, the self-employed pension fund, and the Public Sector Provident Fund.”
With regard to the elderly allowance programme, the report recommended several changes concerning the relevant parameters and targeting.
“The benefit level of Rs. 2,000 a month needs to be reviewed. At less than half of the individual poverty line, the level may be inadequate to enable many of the poorest elderly to subsist. The authorities will need to weigh the fiscal affordability of this change also. The current design of providing the benefit as a supplement to those individuals in poor households (that presumably should qualify for Samurdhi social assistance) is sensible and should be maintained.”
Noting that until recently there have been large waiting lists of individuals that have qualified to receive the elderly benefit but have not received it, the report added that either the targeting should be narrowed or the queue addressed or both.
It further said that targeting related outcomes need to be improved, possibly by employing a social registry, as is being undertaken for other social assistance programmes, by working closely with the Welfare Benefits Board.