Social Transfer Benefits and Retirement Decisions: Evidence from South Africa

• Author: John Garen,Steve Muchiri
• Date: 01 March 2018
• Published date: 01 March 2018
• DOI: http://doi.org/10.1111/saje.12180

SOCIAL TRANSFER BENEFITS AND RETIREMENT

DECISIONS: EVIDENCE FROM SOUTH AFRICA

STEVE MUCHIRI*AND JOHN GAREN

†

Abstract

Population aging poses a new challenge to the fiscal sustainability of social security programs

around the globe. As life expectancy increases, among other reasons, many governments in devel-

oped countries have begun to reform key features of their programs, such as increasing the eligi-

bility age for access to social benefits. However, as in the case of South Africa, some opt to

decrease the eligibility age for access to such pension benefits. The South African old age pension,

which is one of the most expansive cash transfers in developing countries, puts a significant

monthly cash transfer in the hands of its recipients. This cash transfer is conditioned on age and

a means test that is very generous to most South Africans. In this paper, we seek to understand

the impact of such an increase in non-labour income on the labour force participation of older

men by exploiting a phased-in reduction in pension eligibility age. We estimate that, at the

median predicted market wage, pension age-eligibility reduces the probability of labour force par-

ticipation by approximately 9.85% points for single males and 15.45% points for married males.

JEL Classification: O15, J14, J26

Keywords: Old age, pension, retirement, apartheid

1. INTRODUCTION

A race-based public pension plan was a vestige of the colonial and apartheid South

African governments. As steps were taken to make it more race neutral at the end of the

apartheid era, it became clear that the pension was a very large positive wealth shock for

low-wage black South Africans as compared to many others.

1

While this makes it more

likely to alleviate poverty in this group, it is also more likely to distort labour supply.

This paper investigates the latter.

Given that means-based social benefits are not randomly assigned, one of the chal-

lenges in the empirical literature is to obtain an exogenous variation to identify its behav-

ioural impacts, and some of the studies that have attempted to examine the impact of

old age pensions (OAP) on labour supply are based on cross-sectional variation. One

limitation of this approach is that other factors such as previous income may be

* Corresponding author: Assistant Professor, Department of Economics, Eastern Connecticut

State University, Willimantic, CT, USA. E-mail: muchiris@easternct.edu

†

Department of Economics, Gatton College of Business and Economics, University of Kentucky

1

While racial classifications are largely associated with South Africa’s colonial and apartheid

period, they are still in use in the country, particularly to monitor progress towards establishment

of equality. Four discrete categories are commonly used: “whites” (people of European descent),

“coloured” (mixed races), “Indians or Asians” (settlers from the Indian subcontinent) and

“Africans” (people of African descent). In some cases, the distinction is only made between “white”

and “African/black” South Africans, where the latter includes “coloureds,” “Indians or Asians” and

“Africans” (Van Zyl,2003). This paper refers to the groups as used in our data set.

V

C2017 Economic Society of South Africa. doi: 10.1111/saje.12180

23

South African Journal of Economics Vol. 86:1 March 2018

South African Journal

of Economics

correlated with both pension receipt and labour supply decisions leading to biased esti-

mates. Use of panel data could mitigate these issues; however, another potential solution

is to exploit a natural experiment and study behavioural responses around the policy

change. An advantage of this approach is that the policy reform generates some exoge-

nous variation in eligibility. With a suitable control group, to control for common

trends, we can isolate the behavioural impact of the eligibility reform. South Africa’s

OAP system reforms in 2008 provide this natural experiment and an opportunity to

examine the impact of pension age-eligibility on labour force participation.

Through the OAP, the South African government provides a monthly cash transfer to

older individuals, i.e. conditioned on age with a means test that is very generous to some

income levels. This program is one of the most expansive cash programs, not only in

South Africa, but also in developing countries (Lam et al., 2006), and consequently there

is substantial literature addressing its behavioural effects. The empirical work on this pro-

gram, however, has generally used 1989–1996 data,

2

a period characterised by the expan-

sion of the pension benefits to previously disadvantaged race groups (Legido-Quigley,

2003), and are based on cross-sectional variation for identification. To our knowledge,

our study is the first to explore the variation in pension eligibility brought about by the

South African OAP reform of 2008 to study the impact of pension eligibility on labour

force participation of the recipients. The reform in question reduced men’s minimum eli-

gibility age from 65 to 60, thus extending coverage to previously uncovered men. We

rely on a recent dataset from the General Household Survey (GHS), which begins 12

years after the end of the apartheid era and when the pension’s benefits were extended

equally to all race groups. We exclude whites because our data shows that their pension

receipt, upon age-eligibility, is very low and therefore clouds the estimated impact on

labour force participation rates of other groups that are heavily affected by the pension

program. We further control for expected market wage.

The relevance of OAP to South Africans is underscored by, first, its high recipiency rate.

Approximately two-thirds of older South Africans report receiving the pension grant (Sie-

naert, 2008; Woolard and Leibbrandt, 2010).

3

Second, the pension is generously high by

world standards, such that it provides a cash transfer that is almost twice the median per

capita African/black income (Ardington et al., 2009).

4

Hamoudi and Thomas (2014) find

that it also accounts for more than 85% of total household income in African/black house-

holds receiving the pension in urban areas, and in rural areas more than 25% of the Afri-

can/black households receiving a pension report it as their only income. As such the

pension has potential to influence behavioural changes in important ways.

2

See (Duflo, 2000, 2003; Bertrand et al., 2003)

3

The rate is higher among Africans/blacks, such that 9 out of every 10 age-eligible black South

African men and women report that they receive the pension grant (Ambler, 2016). Approxi-

mately 4.1 million South Africans are 60 years and older (about 7.8% of the South African popula-

tion (Statistics South Africa, 2013)) and 2.7 million of them receive the pension.

4

Woolard and Leibbrandt (2010) states that the set monthly amount of 1080 South African

Rand (R1080) corresponds to about 175% of median per capita monthly wage in South Africa.

Møller and Ferreira (2003) show that the pension is a significant source of income in older house-

holds, such that it is often the only source of income in these households, particularly those in rural

areas.

24 South African Journal of Economics Vol. 86:1 March 2018

V

C2017 Economic Society of South Africa.