The main purpose of minimum pension and social assistance programmes for the elderly is to guarantee a minimum standard of living after retirement, and therefore alleviate poverty in old age. But they can often cause undesirable side effects that can cause harm on a personal level and to the state economy.

An article by Sergi Jiménez-Martín, professor at the Department of Economics and Business at UPF and of the Barcelona GSE, published on the platform that targets scholars and managers in the field of employment, IZA World of Labor, sets out the various pros and cons of minimum pensions, discusses how these programmes are managed in different countries, and gives a number of tips for them to be beneficial to individuals and to the labour market.

In many countries, the minimum pension programme is crucial for the welfare and retirement decisions of low-income workers with intermittent employment histories

In his article, the author separates the two types of existing minimum pensions, non-contributory minimum pensions or social assistance minimum benefits and minimum contributory pensions, and highlights the main factors that determine them, such as age, income, average salary and the number of years of contributions.

In many countries, the minimum pension programme is crucial for welfare and greatly influences the retirement decisions of low-income workers with intermittent employment histories. “In the developed countries, the main purpose of minimum pension programmes is to guarantee a minimum standard of living after retirement, and in many developing countries, their purpose is to alleviate poverty in old age”, says Sergi Jiménez-Martín. This is one of the positive aspects of these programmes, as well as the fact that they transfer income from people with high income to others with low income.

Undesired effects of minimum pensions and advice for politicians

However, according to the study, a minimum pension may have unwanted indirect effects, primarily with an increase in early retirements, a reduction or elimination of incentives to continue working and saving, and a decrease in the accumulation of people’s wealth. “The design of many minimum pension programmes tends to create strong incentives for low income workers to retire as soon as they are eligible to do so. This leads to a reduction in existing job opportunities for workers approaching retirement age”, the researcher notes.

The study analyses the situation of various countries, such as Belgium, France, Luxembourg, Chile, Peru and Spain, and circumscribes the effect of minimum pensions to a life cycle model, which it divides into two stages: before retirement and after retirement. According to the author, “a minimum pension changes these patterns crucially, and one of the most visible effects it causes is a redistribution of the income of workers in the course of this life cycle”.

Some of the more subtle effects that it can cause and that according to Sergi Jiménez-Martín arise with the existing model of minimum pensions in Spain, are that it removes the incentives, in the years before normal retirement age, to work in order to ensure a future pension; and that it increases the total wealth of the life cycle, which often leads to increased consumption, but can cause savings and the accumulation of private assets to decrease substantially before retirement.

Finally, Sergi Jiménez-Martín offers some political advice for application to pension and social assistance programmes, which, although in most countries manage to alleviate poverty and guarantee a minimum standard of living after retirement, need to assess other aspects: “we should include some incentives for people who are in a position to access the programmes to continue working for longer and that minimize the possible disincentives for low-income workers to take up or continue in employment”. According to the UPF professor’s analysis, Chile, for example, with its pension supplements programme, is heading in this direction, while the model in force in Spain is not.

Reference work: Sergi Jiménez-Martín: “The incentive effects of minimum pensions”. Iza World of Labour