On non contributive programs

The lack of coverage of social security based programs has spurred the implementation of non contributive programs in pensions and health almost all around the continent. While these programs can have a positive impact on the well being of the population, we must be aware of some hurdles that need to be overcome in order to avoid undesirable results given the incentives they provide and the failures in their designs. It has been recognized that no contributive programs:

1) Can have adverse effects in the decision of workers to participate in the formal labor markets and on the entrepreneurs´ decisions regarding their activities.
2) They can have effects in the basket of consumption and savings within families and in the intra-families transfers.

The first means that persons will find more profitable to work in an informal job (that it is not taxed) since at the end the persons will receive the services; and the entrepreneurs will find more profitable also to focus on low productivity (not taxed) activities. The second one refers to the fact that since families will receive extra money they may change their consumption and their savings patterns and intra-family transfers of money.
In order to avoid these distortions, authorities have two main degrees of freedom: size of package to be covered and targeting. This design may help to minimize these adverse effects, still many operational issues should be tackled in order to reach the goals of the program. Moreover a continuous monitoring of the programs is a must.
The following example illustrates (see photo) the alternatives governments have and how programs can fail to reach their goals. The local government of Mexico City offers a non contribute pension to all people over 70 years resident in the city. The pension is equivalent to half of the minimum wage. The pension was aimed at helping elderly during their last years. What we see in the photo is that the pension can be used to pay in a cafeteria in which the average price of a meal equals approximately 1.5 daily minimum wages. This takes us to the following questions: ¿should a pension be provided to all or only to the poor? ¿How can the government guarantee that the money is used to consume basics? ¿How can a more restrictive program be implemented with out increasing significantly the administrative cost?, just to mention a few ones. The answers to these questions should be technical and a monitoring and evaluation strategy can help to design better programs.