1

Cash Transfers

Cornelia Mihaela Tesliuc

Social Safety Nets Core Course

February 26, 2008

1

2

Cash Transfers: Summary Sheet

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.

Needs Based transfers (which include food stamps), non-contributory pensions, family allowance

Disadvantages• Targeting methods can be information intensive • Transfers are fungible, subject to unintended

household uses

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.

Appropriate Context• Essential commodities available on the private market

Key Design Features• Good administration for selection of beneficiaries and cash/food stamp distribution• Distribution and reclamation chain for food stamps

2

3

Outline

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

3

4

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

55

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

6

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 living6

7

A. Guaranteed Minimum Income (GMIs)

• 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

Examples:(most European

OECD countries)

Belgium;Bulgaria;Czech Republic;Estonia;Finland;France;Germany;Hungary;Romania;Slovakia.

88

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

Example: Bulgaria Guaranteed Minimum Income

Basic design features

9

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.

Spending on means-tested last resort income support in selected countries

0

0.10.2

0.3

0.40.5

0.6

0.70.8

0.9

% o

f G

DP

10

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

1 (poor) 2 3 4 5 (rich) Total

Bulgaria 15 1 1 1 0 4Estonia 10 2 1 0 0 3Lithuania 14 2 1 1 0 4Poland 9 2 1 1 0 3Romania 19 2 1 0 0 4

Coverage (%)quintiles of pre-noncontributory transfers

11

GMIs Outcomes (cont’d)

1 (poor) 2 3 4 5 (rich) TotalBulgaria 26 7 9 5 7 18Estonia 43 22 13 18 11 32Lithuania 22 9 14 4 2 16Poland 39 24 21 15 13 29Romania 31 16 12 7 9 26

Adequacy (%)quintiles of pre-noncontributory transfers

1 (poor) 2 3 4 5 (rich) Total

Bulgaria 83 4 7 3 3 100Estonia 77 14 5 2 2 100Lithuania 80 9 8 2 1 100Poland 64 18 10 4 3 100Romania 85 10 3 1 1 100

Targeting (%)quintiles of pre-noncontributory transfers

12

B. Social Pensions• 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

Examples:Australia, New

ZeelandCanadaSouth Africa,Namibia,Mauritius,BotswanaIndia,BangladeshNepalBolivia, Chile,

Argentina, Costa Rica, Uruguay, Brazil

13

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

14

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

15

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)

16

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

16

Examples:Most OECD

European countries

Central and Eastern Europe, Former Soviet Union countries

South AfricaArgentina

17

Example: Family allowanceThe 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

18

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.

19

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 StatesHondurasSri LankaMexicoColombiaJamaica (until

2002)

20

Tax Credits (TCs)• 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.

21

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.

22

How Important are Cash Transfers?

• Level of spending

• Coverage of the poorest

• Generosity (level of benefit)

22

2323

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

Social Protection Spending, Region Averages

2.5 1.73.6

1.3 1.0 0.9

13.2

8.33.0

3.8 2.91.4

0

2

4

6

8

10

12

14

16

18

OECD (N=23) Eastern Europeand Central Asia

(N=25)

Middle East andNorthern Africa

(N=10)

Latin Americaand Carribean

(N=25)

East Asia Pacific(N=4)

South Asia (N=5)

% o

f GD

P

Social Safety Nets Social Insurance

Notes: Data on 69 countries taken from WB Public expenditure reviews or other similar work. For OECD, data from the OECD Social Expenditure database (OECD, 2004). Different years, most data from 2000 to 2003.

24

How Important are Cash Transfers? Coverage of the poorest 20% by SP programs in transition economies

240% 20% 40% 60% 80% 100%

Tajikistan

Uzbekistan

Kyrgyzstan

Moldova

Georgia

Azerbaijan

Armenia

Albania

Belarus

Bosnia Hertzegovina

Kazakhstan

Macedonia

Serbia-Montenegro

Romania

Bulgaria

Russia

Lithuania

Poland

Estonia

Hungary

Only Social Assistance Both SI and SA Only Social Insurance Not covered

Coverage of the poorest quintile by Social Protection Programs

Countries ranked in decreasing order by per capita GDP in 2000 PPP

25

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

25

Generosity of Needs-based social assistance programs in transition economies

0% 10% 20% 30% 40% 50% 60%

Tajikistan

Azerbaijan

Kyrgyzstan

Moldova

Serbia-Montenegro

Albania

Kazakhstan

Bulgaria

Uzbekistan

Belarus

Russia

Bosnia Hertzegovina

Armenia

Hungary

Lithuania

Poland

Romania

Estonia

Georgia

Macedonia

Generosity = benefits / consumption of the beneficiary household

26

How Important are Cash Transfers? Generosity: Family allowances

26

27

How Important are Cash Transfers? Generosity : Social Pensions

27

28

How Important are Cash Transfers? Generosity : social assistance

28

Relative Incidence: Social Assistance

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Q1 Q2 Q3 Q4 Q5

Tra

nsf

ers

as %

of

To

tal

Inco

mes

(C

on

sum

pti

on

)

Argentina

Brazil

Chile

Colombia

Dom. Republic

Guatemala

Mexico

Peru

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

2929

Cash transfers: Pros and ConsPros 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

30

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

31

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

32

Design Considerations

1. Keep expectations reasonable (!)2. Program responds appropriately to risk and is

fiscally sustainable3. Resources targeted to the needy/vulnerable4. Benefits are adequate5. Avoid undesired incentive effects (will be covered in a

separate session)

6. Transfers are gender inclusive7. Adequate administrative capacity8. Political support is sustainable

32

33

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

34

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

35

2. Program responds appropriately to riskEstimating Transfer Costs: Needs-Based Program

35

36

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 costs36

37

4. Benefits are adequate

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

38

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

39

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

40

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

41

Cash Transfers: Summary Sheet

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.

Needs Based transfers (which include food stamps), non-contributory pensions, family allowance

Disadvantages• Targeting methods can be information intensive • Transfers are fungible, subject to unintended

household uses

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.

Appropriate Context• Essential commodities available on the private market

Key Design Features• Good administration for selection of beneficiaries and cash/food stamp distribution• Distribution and reclamation chain for food stamps

41