Social Pensions and their Contribution to Economic Growth

Author: Anh Tran, Stephen Kidd
Regions: Sub-Saharan Africa
Country: Uganda
Year: 2017
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Old age pensions are usually viewed as a cost to the state and, despite their significant impacts on the wellbeing of older persons, it is rare for them to be understood as investments in economic growth. Yet, there is good evidence that an inclusive old age pension should be a core element of any country’s economic growth strategies. Uganda’s Senior Citizens’ Grant (SCG) is an excellent example of an inclusive pension and there is good evidence of its impacts on economic growth.

Pensions contribute to economic growth through a range of pathways at household, community and national levels. Within households, they are used to invest in children, tackling stunting and enabling them to attend and perform well in school, thereby helping them become a more effective and productive workforce. Pensioners and their families use the cash they receive to invest in income generating activities while working age household members are better able to gain employment, increasing overall productivity of the labour force. They also enable households to recover their productivity more quickly following shocks.

Across communities, the injection of cash into markets can stimulate local economies, with significant multiplier effects. Many entrepreneurs can benefit from the increased economic activity in local markets and there is good evidence of traders, in particular, doing well. Others, including unemployed young people, can sell their labour to pensioners. In fact, in recent years, the districts where the SCG has been implemented have performed better than other districts across a range of indicators, including employment. Governments can also use the payment of pensions to encourage financial service providers to increase their presence in more remote parts of the country.

At national level, the increased consumption and demand generated by people spending their pensions can be a significant stimulus to national economies, bringing benefits to business. Inclusive pensions can strengthen social cohesion, generating more peaceful and equitable societies and building an improved investment climate. Universal tax-financed pensions can also underpin contributory schemes, helping them grow their funds and offering resources for large investments in the economy. Furthermore, as the IMF argues, high levels of inequality can hinder growth and old age pensions have proven to be a key
tool in reducing inequality.

Therefore, the SCG could play a major role in generating economic growth across Uganda, as well as ensuring that the benefits of growth are shared. It is imperative that it is rolled out nationally as soon as possible so that the country can derive the maximum economic, social and political benefits. A national old age pension for everyone aged 65 years and above would cost no more than 0.4 percent of GDP but the impacts would be very significant, ensuring that every Ugandan lives his or her final years in dignity while enhancing the productivity of the labour force and benefiting entrepreneurs nationwide.