Redistributing income to the poor and the rich : public transfers in Latin America and the Caribbean

Abstract

Recognizing that redistribution is only one of many roles for social policy, the findings of this report reinforce the recommendations commonly made in the literature on social protection in Latin America and the Caribbean (LAC) - arming them with additional evidence on redistributive impacts including: Reducing pension deficits - and rethinking some highly regressive social insurance programs - must be a top priority on the policy agendas in LAC. These findings are consistent with recommendations for social insurance from other World Bank publications, emphasizing: (a) the need to reduce regressive net subsidies for pensions by promoting fully-funded pension plans for those who can afford it and (b) reserving subsidized pensions for the poor and moving away from the restriction of such benefits tied to formal sector employment. Improving the targeting of social assistance transfers is also a priority in many cases - at least as a short-term measure, short of a more sweeping overhaul of social policy. As noted above, many social assistance transfers are regressive, despite explicit objectives to assist the poor. Yet this study - and others8 - clearly shows that better targeting is feasible. The targeting mechanisms used by conditional cash transfers, for example, could be adopted by other social assistance programs. In cases where social assistance programs are well-targeted and otherwise effective, countries might also consider the possibility of increasing unit subsidies for better redistributive and poverty impacts - perhaps with eventual savings from further reforms to reduce pension deficits. Yet this raises the issue of potential adverse incentive effects. Although evidence of strong labor disincentives is absent for these programs in LAC, and certain design features would plausibly discourage such effects, policy makers in LAC should more explicitly incorporate design features to reduce potential work disincentives - and researchers should further investigate this potential. Moreover, any potential increase in unit transfers should be weighed against other development priorities. But targeting and design improvements to individual social assistance programs are not enough. An adequate mix of instruments is needed to weave a social safety net that (a) promotes other roles of social policy (promotion of human capital, smoothing consumption, and ensuring adequate protection against shocks, in addition to redistribution); and (b) covers a variety of circumstances, including programs tailored to the needs of specific vulnerable groups.