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