CSPS Seminar on "Welfare and fiscal costs implications of extending pension to informal workers in developing countries"

This paper formulates a life cycle model that incorporates a key feature of the labour market in developing countries—informal workers do not have access to pension hence lack formal protection against income and longevity risks when they are old—to the study effects of introducing a non-contributory universal non-mean tested pension to elderly informal sector workers. We use data from Ghana to estimate the behavioral parameters of the model and then simulate the changes induced by the pension in welfare and fiscal costs. We find that the extension of pension to informal workers improves social welfare as the positive redistributive and insurance effects dominate losses due to the imposition of consumption tax to finance the pension system. We estimate an optimal pension transfer of about 33 percent of the monetary poverty line.
 

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