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Pension Reform Challenges
and Trends in Latin America
Rafael Rofman
Social Protection Unit
Latin America and the Caribbean
The World Bank
World Bank Core Pensions Course
Washington, DC, November 2010
OutlineBackground: The Social Insurance schemes in Latin America
The situation until the 1990s
The reforms
The situation in the mid 2000s
Recent reforms and debates
VERY recent reforms and debates
Pending challenges
Background
Social Insurance schemes in Latin America originated in three waves:
– “Pioneer” countries (Argentina, Brazil, Uruguay, Chile, Cuba)
– “Intermediate” countries (Costa Rica, Ecuador Mexico, Colombia, Peru)
– “Latecomers” countries (Bolivia, Ecuador, most Central American and Caribbean)
The pioneer countries
Pension systems originated in the early
twentieth century
Fragmented schemes, responding to
pressure groups (civil servants, unions)
Legal coverage became wide, due to
continuous expansion. Actual coverage
high but not universal
Generous benefits, high fiscal costs
Intermediate countries
Systems originated in the 1940s/50s
(post WWII)
Initiative from the State (Welfare
State), resulting in less fragmentation
Lower legal and actual coverage
Less generous, less expensive
Latecomers
System created in the 1960s/70s
Highly centralized, organized from the
State with welfare concerns
Usually targeted and limited in
benefits
Fiscally sustainable, thanks to low
coverage and benefits
Some common problems: Aging
0%
5%
10%
15%
20%
25%
30%
35%
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
TOTAL
Latecomers
Intermediate
Pioneers
Insufficient Coverage:% of labor force contributing in the 1990s
0
10
20
30
40
50
60
70
80
BO PY NI PE EC GU SA CO VE MX AR BR UY CR CL
Source: Rofman, Lucchetti and Ourens (2008)
Insufficient Coverage:% of elderly receiving pension in the 1990s
0
20
40
60
80
100
HO DR PY GU SA MX CO PE VE PA CR AR CL BR UY
Non cont. Cont.
Source: Rofman, Lucchetti and Ourens (2008)
Unsustainable Parameters
– Retirement ages around 50-60
yrs.
– Replacement rates 75% and
higher
– Lax contribution requirements (as
little as 5 years…)
– Special regimes even more
generous
Increasing cost
Expenditures in Social Protection (% of GDP) 1990
0
2
4
6
8
10
12
UY BRA CHI PAN ARG BOL MEX PAR COL
Source: Rofman, Lucchetti and Ourens (2008)
Declining sustainability
Implicit Pension Debt, % of GDP, 1990
UY
CU
PER VLA BOL DR HON
CHI
COL
0
50
100
150
200
250
300
350
ARG BR PAN CRI MEX PY NIC GUA ECU ESA
Source: Rofman, Lucchetti and Ourens (2008)
Consequences…
High costs
Subsidies
Low Coverage
Regressive
TransfersFiscal
PressureInequities
Unsustainability
The reforms…Most countries
Main components:
1. Parametric reform
2. Introduction of DC schemes
3. Funding
4. Private management
Several countries stopped at (1) or (2)
Parameters…
Increases in retirement age
Increases in vesting period
Increases in contribution rates (not
always…)
Reduction in replacement rates
DC schemes…Fully (Peru, Mexico) or partial
(Argentina, Uruguay, CR) shift to DC
schemes
Managing agencies accumulate assets
Funding…
Private management…Biggest debate, that hid other reforms
Systems not really privatized, more like a concession of a public utility
State remains relevant in
– financing part of the system,
– Collecting
– Enforcing
– Guaranteeing minimums
The politics behind the reforms
- Difficult processes. In some cases
(Chile, Peru) were approved by non
democratic governments, in others
required long negotiations and years
of debate
- Results not always as planned, due to
pressures of interest groups
The situation in the mid 2000s
- Fiscally:
- Medium and long term sustainability
improved
- Short term pressure important, may
have contributed to fiscal crises in some
cases
- Overall outcome depends on institutions
strength.
Coverage in the 2000s:% of labor force contributing to pensions
0
10
20
30
40
50
60
70
80
BO PY NI HO DR PE EC GU SA CO VE MX AR PA BR UY CR CL
1990s 2000sSource: Rofman, Lucchetti and Ourens (2008)
Coverage in the 2000s:% of elderly receiving pensions
0
20
40
60
80
100
HO DR PY GU SA MX CO PE EC VE PA CR AR CL BR UY BO
1990s - Non cont. 2000s - Non cont.
1990s - Cont. 2000s - Cont.
Source: Rofman, Lucchetti and Ourens (2008)
Recent reforms: focusing on
coverage
- Increase contributions
- Easier access to contributory benefits
- Non Contributory benefits
- Intermediate approaches (Argentina 2007)
More contributions
Strategy depends on diagnostic:
– If participation is low because of poor incentives
Matching contribution
Bundling with other programs
More transparence and efficiency
Reduced contribution rates
Paperwork simplification
– Colombia’s case: limited success
Monotributo
More contributions
If participation is low because of weak enforcement
Increase supervision
Crosscheck databases
Integrate information systems
–Difficult and costly to implement, particularly for small and medium size firms and independent workers
–Relevant on the positive part of the cycle
Easier access
Reduce vesting period
–Reasonable in some cases (UY, reduced from 35 to 30 yrs), better to offer proportional benefits
Early retirement
–No impact on final coverage, improves temporary problems
Non contributory benefits
If targeted and small
–Small impact (4% of Chile’s, 3% of Argentina’s elderly in the early 1990s)
If universal and large
– Incentives problems
–Fiscal restriction
Challenge: Find a balanced option!
RECENT EXPERIENCES
70.4% 66.3% 63.6% 61.7%
4.1%7.7% 13.9% 17.4%
77.2% 75.9% 77.6% 78.7%
0%
20%
40%
60%
80%
100%
1990 1994 2000 2006 2009
Contributory Both Non contributory
Chile: Complementing a high
coverage level
Source: Rofman, Lucchetti and Ourens (2008)
Bolivia: Universal Benefit
17.7%
2.9% 0.9%
15.5% 16.9%
54.0%
72.0%
17.7%
72.3%
89.8%
0%
20%
40%
60%
80%
100%
1990 2000 2006
Contributory Both Non Contributory
7
Source: Rofman, Lucchetti and Ourens (2008)
75% 73%68% 64%
3.0% 3.0%3.0%
5.0%
78.1% 76.3%70.7% 68.8%
0%
20%
40%
60%
80%
100%
1992 1996 2000 2006 2008
Contributory Both Non Contributory
7
Argentina: Moratoria
Source: Rofman, Lucchetti and Ourens (2008)
Very recent reforms
Financial crisis spurred concerns
about funded/DC schemes
Some governments reacted
proposing switch back to PAYG
– Argentina closed the funded scheme in
late 2008
– Discussions in Peru, Uruguay
Very recent reforms
Extreme concerns seem to be ill-
advised
– Returns in 2008 were negative, but still
large and positive over 5+ yr period
– Recovery during 2009/2010
– Multipillar schemes protect workers from
hard hit
– Only retiring workers might be affected,
special provisions necessary for them
Conclusion– Pending Challenges
The core challenge in LAC continues to
be coverage
Fiscal sustainability a problem in a few
countries
Equity concerns, due to public financing
of pensions
Multipillar still a reasonable response, if
well calibrated
Bottom line: Barr’s centrality of output
Some useful background