Last week the Finance Ministry announced it is considering whether to withdraw the old-age allowance from older people with incomes of more than 9,000 baht per month. This proposal -- if adopted -- not only goes against international best practice, but ignores the positive lessons of Thailand's scheme over the last decade. With a modest investment, the allowance has delivered substantial economic and social benefits with administrative simplicity.
It is now seven years since the government decided to make the old age allowance a universal entitlement -- a benefit for everyone aged 60 and older, based on citizenship, not status. Originally introduced in 1993 as a scheme targeted at poor older people, it was expanded in 2009 to all senior citizens apart from the small number receiving government pensions. The main driving force for the reform was the global economic crisis, with the allowance seen as a counterweight to put money back into the pockets of citizens.
Despite the modest size of the benefit, today the allowance is the main source of income for 15% of older people, and is estimated to have reduced the poverty rate among older people by nearly 30%. Recent research led by Worawet Suwanrada of Chulalongkorn University also shows how it provides a stimulus to local economies, particularly in rural areas. The research found 53% of the allowance is spent within the community.
It also found the allowance helps reduce income inequality among older people, and also among households with older members. The allowance not only has a positive economic impact but also wider developmental benefits related to nutrition and health. Studies from Thailand and other countries show most recipients of such allowances spend some of the money on food for themselves and the whole household. In Thailand, studies found half of the allowance is used to buy food. Many recipients spend part of the money on health-related costs such as transport to hospital and basic medicines for minor illnesses.
Why not provide the allowance only to the poor? The expansion of the allowance in 2009 responded to years of challenging experience in trying to target the pension at only the poorest older people. The universal approach has been far simpler than a targeted approach for local authorities to implement. No poor older people are excluded as a result of screening processes, which are seen as unfair or inaccurate and are always demanding on local governments.
Selective targeting can also lead to tension and conflict within communities: most people perceive themselves to be no more affluent than their neighbours. A blanket approach means lower administrative costs, and social workers have more time to provide practical support to older people, vulnerable children and other groups.
In the meantime, Thailand's scheme has become an example of best practice in the design of pension systems across the Asean region and the world. Many countries now look to the old-age allowance as a success story of how to build an effective social protection system for old age. So, the benefits have been clear. What about the costs?
The questions of financing should not be taken lightly. Yet the potential savings of the proposed cuts seem to be overstated, and the projected costs of the scheme are not unusual for a middle-income country such as Thailand.
According to the 2014 Survey of Older Persons in Thailand, about 15% of the population aged 60 and over would be excluded if the new benefit cuts take effect. However, the new proposal seems to ignore the fact many of these people are not currently receiving the allowance. Analysis of the Thai Household Socio-Economic Survey shows a significant proportion of better-off citizens do not claim the allowance, either because they already receive government pensions, or they consider themselves sufficiently well-off without it.
This means the likely savings of the proposed cuts are low. What a new screening process would do is add a huge administrative burden on government, and older people themselves would likely be obliged to prove they have low incomes. It could also damage efforts to strengthen other parts of the pension system.
An income cut-off would likely mean that many people who have saved hard for a contributory pension would suddenly be excluded from the allowance. This "tax" on saving could create disincentives to save, just at a time when the country should be strengthening contributory pensions.
The future costs of the allowance are also manageable. It is certainly true Thailand is set to face unprecedented population ageing over the coming decades, meaning many more older people will become eligible for the allowance. Yet the picture is not as bleak as is often portrayed. First, it is important to note that the current expenditure on the allowance, around 0.5% of GDP, is modest compared to what other countries spend. For example, Brazil, South Africa, the Maldives and Namibia -- all of which have a lower GDP per capita than Thailand -- spend more than 1% of GDP on their allowances for old age.
Second, higher expenditure on pensions is to be expected as countries become wealthier over time. By 2050, Thailand will be an "older" country, but it will also be a richer country. OECD countries spend an average of 8% of GDP on their pension systems. Projections of expenditure on Thailand's allowance also indicate that, in a few decades, growth in expenditure as a percentage of GDP will slow down or even level off as a result of economic growth. Plus, there are ways of saving costs in the future, including changing how the benefits are adjusted for inflation and gradually increasing the eligibility age as life expectancy increases.
Rather than making arbitrary reductions, now is the time to invest in the allowance, which remains a modest policy relative to the scale of the income insecurity faced by older people. The benefit level, of between 600 and 1,000 baht depending on the age of the recipient, is well below the poverty line of 2,647 baht (2014) per month. The minimum benefit of 600 baht is less than 4% of average incomes in Thailand, which is a lower benchmark than schemes of some poorer Asian countries such as Bangladesh, Nepal, the Philippines and Vietnam. The discussion should therefore be about how to ensure the benefit level keeps up with the needs of the elderly over time.
In sum, as Thailand looks to a period of rapid ageing, the priority should be to reinforce the old-age allowance, and ensure it provides an adequate minimum. This would build on positive lessons from international experience, and cement the country's position as a trend-setter for social protection in old age.
Charles Knox-Vydmanov, Social Protection Policy Adviser and Usa Khiewrord, Regional Programme Manager, HelpAge International.