Governments Giving Gifts – Populations Acquiring Rights

By Lykke E. Andersen*, La Paz, 22 October 2007.

Recently, the Bolivian government has made a generous change to the universal pension payment scheme (formerly BONOSOL, now Renta Dignidad) lowering the pension reception age from 65 to 60 years, and increasing the annual payment from Bs. 1.800 to Bs. 2.400. This means an immediate doubling of universal pension payments. However, due to the rapidly increasing population aged 60+, already by 2025 this implies a pledge of 3.5 times the current universal pension payments.

The government expects ever increasing natural gas rents to pay for this scheme. With a little luck, the exceptionally high natural gas revenues will continue for several more years, but some day they are likely to come crashing down. The current spike in oil-prices looks a lot like the spike in the late 1970s, and it can end just as suddenly (see Figure 1).

Figure 1: Evolution of world oil prices, 1947 - 2007.

                                Source: www.wtrg.com.

By the time oil prices come down, however, these pension payments will have become a perceived right, and many people will have difficulties doing without them, and will strongly object to their reduction.

Apart from the problem of unsustainability – which is shared by most countries’ pension systems – there is also a problem of justification. Public spending should either be an investment in public goods (which increases total productivity) or a transfer from rich to poor (which increases total utility). The Renta Dignidad is neither. As shown in Figure 2 below, the older age groups have below average poverty levels, and such transfers reduce the funds available for the provision of infrastructure and other public goods.

Figure 2: Poverty rate in Bolivia, by age group, 2005

                              Source: MECOVI 2005.
                              Note: A person is considered poor if average per capita income in the household is below the official poverty line.

In contrast, the Bono Juancito Pinto for school children is justified on both accounts. It is a transfer that benefits the poorest segments of the population (see Figure 2), and since it is only given to children who attend school, it encourages education, which has both an investment component and a public good component. Nevertheless, the Bono Juancito Pinto is only a small fraction of the size of Renta Dignidad (Bs. 200 versus Bs. 2400).

Old people have had a lifetime to accumulate assets, and if they do not have enough for retirement, it is to a large extent due to their own lack of planning and prevision. In contrast, if children are poor, it is in no way their own fault, and they deserve all the help they need to overcome their initial disadvantage.

In conclusion, if the government wants to give away money, I would much rather see them pamper the children than the old. The former will carry Bolivia into the future, whereas the latter represent the past.

Related articles:

- The Worst Way to Use the Hydrocarbon Revenues

- True Public Goods, Local Consumption or Imported Goods

- How can $700 million in government revenue be bad for the poor?

(*) Director, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: landersen@inesad.edu.bo.

Ó Institute for Advanced Development Studies 2006. The opinions expressed in this newsletter are those of the author and do not necessarily coincide with those of the Institute.

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