World Bank’s Push for Individual Savings Provides Little Protection for Crisis-hit Workers

Abena Konadu, a trader at Tema Lorry Station Market, Accra, Ghana

30 March 2022

Both savings and social protection systems are important, and, on some level, they respond to similar needs: they can help us navigate uncertain futures, stabilise consumption across financial peaks and troughs, and enable us to invest in all kinds of opportunities.

Yet, it is important to insist that they are not the same and follow very different principles. Emphasising one over the other has important consequences for equity and income security.

In this light, a recently launched report by the World Bank that provides guidance on how to expand Social Protection for the Informal Economy in Africa and beyond, requires a response.

The report provides a nuanced and data-rich introduction to informal work in Africa, as well as highly relevant insights into the experiences of informal workers during the COVID-19 pandemic, including their (limited) access to social protection. The authors offer a range of thought-provoking ideas on the role of digital technology in social protection – an area of rapidly growing importance that all of us need to think more about. Given the obstacles informal workers face in accessing social protection, and the limited progress so far, any innovative thinking should be welcome.

After chapter upon chapter full of interesting ideas on how to operationalise social protection for informal workers, the authors come to a somewhat anticlimactic policy prescription: voluntary individual savings accounts – an inadequate and potentially detrimental strategy.

According to Nicholas Barr and Peter Diamond, pension systems have the following objectives: consumption smoothing, insurance, poverty relief and redistribution.

Individual savings accounts only really address the first of these. They can help ‘smooth consumption’ across periods of high and low earnings, by allowing people to put aside money into a rainy-day fund. On all other objectives, the World Bank’s proposal falls short.

The proposed schemes provide only limited protection against poverty, as most poorer workers simply do not earn enough to save much even during their most productive years. The schemes do not redistribute between those with higher and lower incomes: what you save is what you get (plus interest, minus administrative costs and inflation). There can be some redistribution if governments provide subsidies (as suggested in the report) or match workers’ contributions, but these would need to be substantive and sustained to make a difference. Indeed, the World Bank report states clearly that the proposed schemes will be strictly individual affairs. Finally, these schemes themselves will not insure that people will not outlive their savings or that their savings will fail to generate sufficiently high returns. These ‘longevity’ and economic risks are placed exclusively on the shoulders of individual workers.

Of course, it is not fair to assess a single scheme against all pension objectives, which tend to be met via several schemes. The report also argues for poverty-targeted safety nets. However, we know that these tend to be highly exclusionary and, in any case, people above national poverty lines (in Uganda, anyone living on more than US$0.88 to 1.04 a day) are not considered. Calling anyone living on less than a dollar a day ‘non-poor’ is simply wrong, but it also shows that the World Bank does not seem to see a role for direct assistance to the majority of informal workers who may not be destitute but nonetheless need support.

Following the substantial and likely lasting reductions in informal workers’ incomes as a result of COVID-19, now is the time to underscore what makes social protection social: risk sharing, redistribution and guarantees.

A forthcoming evaluation by WIEGO of an informal sector pension scheme set up by Ghana’s Union of Informal Workers Associations (UNIWA) highlights the challenges for informal workers to make sufficient contributions. Average monthly contributions were just US$15 or 3 per cent of reported average monthly income. At this rate and the average age (48) of the members, the average savings with interest and adjusting for inflation would amount to just US$2,468 by the age of 60. In reality, the amount will likely be lower, as most workers will have gaps in their contributions. It also does not consider the very high administrative costs charged over the scheme’s lifetime.

This is not to say that there is no role for worker-led savings schemes, but rather to caution that without support, such schemes are likely not enough. Indeed, WIEGO’s experiences with worker-led social protection highlights that while such schemes can ‘show the way’ on how to reach informal workers and ensure their active inclusion, their reach, sustainability and impact is often held back by lack of government support.

The report also begs the question whether the social protection sector has learned from the largely unsuccessful pension privatizations of the last decades. The case of Chile, the first country to privatize its pension system, is illuminating. There, the IMF just noted that the system faces an “inability to deliver adequate outcomes for a large share of participants [which] will continue to magnify” due to demographic change and low interest rates.

A final point to raise is the high administrative costs associated with funded individual account schemes, which will significantly reduce poorer worker’s savings. Nicholas Barr reminds us that over a full career an annual management charge of just 1 per cent reduces a pension by about 20 per cent. This is a challenge that the authors are clearly aware of, and several ways are suggested to control these costs, mainly through the use of technology. What strikes me about the example from Ghana cited in the report, is that none of these costs seem like they can easily be reduced through technology.

… trustees may charge up to 1.33 percent of assets under management per year, while pension fund managers and custodians may charge an additional 0.56 percent and 0.28 percent of assets under management, respectively. Together with a regulatory levy of 0.33 percent, this creates an automatic 2.5 percent headwind that the fund must overcome each year, together with the impact of inflation...

Given the low savings amounts and small size of dedicated schemes for informal workers, there is a serious risk that excessive administrative costs will eat-up substantial portions of the earnings of low-income informal workers, leaving them with limited protection and potentially undermining their trust in social insurance.

I understand that comprehensive social protection systems need to be built from multiple directions and we must start somewhere. However, I think there is a need to question whether policies that have largely failed in the past are being reintroduced under the guise of offering pragmatic solutions for informal economy workers.