Over the past five years, social protection has expanded dramatically around the world. In 2020, one in six people globally received government transfers. This expansion in coverage, particularly in upper- and middle-income countries, has produced a new set of beneficiaries: vulnerable, non-poor households.
Scaling up the coverage of social protection programs has the potential to improve millions of lives. But a major concern is the fiscal cost of broadening the coverage of the safety net beyond structurally poor households. A central policy question is thus whether or not countries should move towards universal or broad coverage of social programs.
A recent IDB study sheds light on this question by providing a nuanced assessment of the impact of monthly cash transfers to middle-income households in Colombia. Overall, the program succeeded in increasing household income, but had only small positive effects on standard measures of economic wellbeing, such as spending and savings. The support of the program was crucial, however, when beneficiary households experienced severe episodes of economic stress, such as the death of a family member.
The study’s findings point to two important policy options for assisting non-poor households. First, developing well-functioning insurance markets may protect middle-income families from a wide array of shocks. Second, social protection programs could utilize innovative targeting tools for vulnerable, non-poor households to reduce the fiscal cost. Targeting tools that allow governments to quickly identify and deliver transfers to households experiencing shocks could prevent them from sliding into poverty at a reasonable fiscal cost.
A Cash Transfer Program in Colombia
The study considers the case of Ingreso Solidario, an unconditional cash transfer program in Colombia. Starting in April 2020, the program delivered monthly transfers of roughly USD$40 to eligible households. It targeted two types of households: those living in poverty that were not covered by pre-existing social programs, and those that–despite not living in poverty–were considered vulnerable to it based on a proxy-means assessment of their living conditions.
The study focuses on the latter set of households, and specifically on those around the program’s upper eligibility threshold, which was equivalent to roughly three times the extreme poverty line. It compares the economic situation of these non-poor households whose proxy-means-test placed them just below the eligibility cutoff (treatment group), making them eligible for the program, to that of households whose proxy-means-test placed them just above the eligibility cutoff (control group), making them ineligible for the program.
Over an 18-month period, per-capita income increased by 25% relative to households in the control group. Consistent with this increase in income, there is no evidence that beneficiary households reduced their labor force participation, a common concern among critics of these kinds of programs. And despite the increase in income, there were no effects on food spending and other measures of food security, and relatively small increase in spending (particularly non-food spending), the payment of past due bills, and formal savings. Beneficiary households were 1 percentage point less likely to exhibit past due bills with utility companies in Colombia’s Credit Bureau database. Likewise, there was a relatively small increase in formal savings proxied by ownership of fix-term deposits.
Beneficiary households also invested part of the transfers in education, and children in eligible households increased the time they spent on schoolwork. These effects on education spending and time use, however, vanished 18 months after the program was launched and do not appear to have improved educational outcomes: Likewise, the study finds no impacts of the program on health outcomes.
Comparing Cash Transfers Effects on Poor and Non-Poor Families
The effects of the program on standard measures of economic wellbeing are positive, but substantially smaller than those documented by other studies of cash transfer programs targeted at poor households in Latin America and the Caribbean, which often find important positive effects on spending and other dimensions of well-being. In the case of food spending and food security, the results are also qualitatively different from those of studies that focus on the impacts of cash transfers for households living in poverty, which tend to find important effects on these measures.
By contrast, in the IDB study, the effects are concentrated in the non-food dimension of spending. One explanation is that middle-income households face different types of constraints and have different concerns than the poorest households. Descriptive evidence supports this explanation; when asked about their priorities during the onset of the COVID-19 pandemic, households’ main concerns were not food security, but the education and health of their family members and covering rent or mortgages.
The Effect of Cash Transfers to the Non-Poor Amid Economic Shocks
The program delivered large positive impacts on spending when beneficiary households faced substantial negative economic shocks. Specifically, the study shows that the death of a household member reduced both household income and spending. However, by providing a stream of income unrelated to the occurrence of deaths, the program was able to offset the negative economic impacts. These results indicate that middle-income households may be partially constrained by lack of insurance and that dynamic targeting of middle-income households experiencing economic shocks could prevent them from falling into poverty.
Traditionally, cash transfer programs are viewed as a tool to fight poverty by targeting the poorest households. However, anti-poverty strategies in middle-income countries should be concerned with both lifting households out of poverty and ensuring that middle-income households do not fall into it. The results from the Colombian case underscore the importance of cash transfer programs delivered to non-poor households in achieving the latter goal. However, while cash transfers are tremendously helpful in offsetting the impacts of shocks, severe shocks are infrequent and affect households at different times. Thus, investments in building adequate targeting mechanisms and delivery infrastructure may help governments reduce program costs and deliver transfers when households need them most.
We are thankful for the support of the National Planning Department and the Department of Social Prosperity in Colombia, and the Division of Health and Social Protection at IDB.