How inflation erodes cash transfers and what to do about it

The indexation of benefits, or anchoring cash transfers to inflation levels, represents a key and underexplored dimension of the adaptive social protection (ASP) agenda. While considerable attention has been paid to coverage expansion as a core function of ASP, this report argues that indexation can be fruitfully framed as a novel feature of making social protection systems more adaptive. Through indexation, the adequacy of cash transfers can evolve – or “keep the pace” – with changing conditions. This report applies an ASP framework to support policymakers in navigating trade-offs in indexation, including presenting new data and experiences to inform whether and how indexation could be calibrated in different contexts.

The adjustment of cash transfers to inflation is more prevalent than often assumed, but it is often discretionary. This report offers a novel stocktaking comprising of 232 non-contributory cash transfer programs across 158 countries. These programs, which encompass unconditional cash transfers, conditional cash transfers, public works, and social pensions, are tracked using 16 indicators for a total of 7,056 datapoints. Almost four-fifth of the surveyed programs have some form of discretionary or automatic indexation, with about one-third of them doing so through automatic adjustments.

Countries have dynamically evolved their approach to indexation significantly. The report’s 14 deep dives into specific country practices document that indexation practices have also evolved remarkably over time, including in terms of altering methods, mechanisms, and frequency of indexation. While indexation is nearly a standard feature in higher-income contexts, a rich set of experiences is emerging across the income spectrum, including salient real-time developments in lower income contexts.

Different types of indexation present comparative strengths and limitations. A system that adjusts transfers discretionarily may have more control over fiscal costs; but it also places those decisions on potentially less predictable and objective – indeed discretionary – decision making processes. The politics of transfer augmentation is greatly reduced, but not eliminated, by automatic indexation; the predictability of automatic benefits yields sizable benefits, but the mechanics of constructing indexation measures also raises a set of data and technical challenges. In cases of skyrocketing inflation, the balance between maintaining purchasing power and fiscal sustainability should also be carefully pondered. In fact, the appropriateness of discretionary, automatic and hybrid indexation modalities vary by context, with the level of maturity in ASP systems and prevailing rate of inflation shaping their viability, effectiveness and efficiency significantly.