In this paper, we estimate the impact of the expansion of an Old-Age Social Pension Program –Pension Program for the Elderly or _Programa Pension para Adultos Mayores (PAM)_ – on extreme poverty and labor supply of the elderly in Mexico, and explore potential underlying transmission mechanisms.

The expansion of PAM in 2013 in Mexico was a major policy decision. By 2014, PAM had become the second largest cash transfer program in Mexico, just below the well-known Conditional Cash Transfer Program PROSPERA (previously known as PROGRESA and as Oportunidades). Between 2012 and 2014, PAM almost doubled its budget reaching 36.5 billion pesos<sup>1</sup> in 2014 which represented 0.21% of the Gross Domestic Product (GDP) of that year and reached 5.5 million beneficiaries, 60% of the population of 65 years of age or older (CONEVAL, 2010-2014).

PAM’s objective is to increase social security coverage and to ensure a basic income for the elderly who are poor or vulnerable and who do not receive any contributory pension or retirement income. While the majority of development economics literature that studies cash transfers shows that this type of program, and social pension programs in particular, have attributable effects on a wide range of welfare indicators, one cannot take these effects for granted. There are many factors that could be preventing programs from achieving their welfare improvement objectives such as reducing old-age poverty. The success of a social program depends greatly on both its design and its implementation. Some of the reasons why social pension programs may not achieve the objective of reducing extreme poverty are: inadequacy of benefit level; deficient targeting, that is, programs being too narrowly targeted or programs not reaching the poorest old age individuals; reduction in labor income through disincentives to work; and crowd out effects on other important sources of income such as private transfers from other households. Understanding the effects of expanding Mexico’s PAM on extreme poverty and labor supply has important policy implications.

In Mexico, as in many other countries in Latin America and the Caribbean, most of the elderly<sup>2</sup> do not qualify for a contributory pension (Rofman, Apella and Vezza, 2015). This leaves the elderly population at risk of old-age poverty, with extremely limited choices (if any) but to keep working and/or to depend heavily on public and private transfers including social programs and aid from informal safety nets such as family members.

Data from the Socioeconomic Conditions Module of the Household Income and Expenditure National Survey (ENIGH-MCS) of 2012 and 2014, show that the elderly’s income was more likely to fall below the official extreme poverty line than the non-elderly’s income in Mexico. In 2012 and 2014, we estimate that the extreme poverty headcount index was about one percentage point higher for the elderly than for the non-elderly population and statistically different from zero. However, when we subtract PAM income from current per capita income, this difference is substantially higher: in 2012, the extreme poverty headcount index was about 8 percentage points higher for the elderly than for the non-elderly, and in 2014 it was 9 percentage points higher. While we acknowledge that in the absence of PAM, individuals are likely to modify their behavior, these differences give us a measure of the relative importance of social pensions as a source of income for the elderly in Mexico.

PAM in Mexico is relevant not only because the population ages 65 years or older has dramatically increased in the last two decades, but also because it will continue to increase in such a way in the

> 1In 2014, the average exchange rate was roughly 14 pesos per U.S. dollar.

> 2For the purpose of this study, we define elderly as any person of 65 years of age or older.

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