the challenge of pension systems - world bankpubdocs.worldbank.org/pubdocs/publicdoc/2016/5/...the...

The Challenge of Pension Systems

in LAC: What’s next for reforms?

Mariano BoschLabor Markets and Social Security Unit

Inter-American Development Bank

*Opinions are my own, and not necessarily coincide with opinions of IDB or its

board of directors. This presentation benefits from the work of a number of IDB

colleagues: Solange Berstein, Mariano Bosch, Santiago Levy and Angel Melguizo

as well as Elodie Bataille, Maria Eugenia de Diego, Angel Muñoz, Laura Oliveri,

and Juan Miguel Villa. It also benefits from our joint work with colleagues at WB, IZA Institute for Labor and OECD.

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Initial thoughts

Many pensions systems in Latin America and the Caribbean underwent

extensive reforms in the 90s yet, often, such reforms did not fulfill the

expectations.

Today, pensions systems in many countries continue being affected by

problems of low coverage, inadequate pensions, regressivity, fiscal

unsustainability, adverse incentives for formal job creation, and

weak institutions. As countries are considering avenues to move

forward, they are discovering there are unpleasant tradeoffs.

This presentation presents these challenges and tradeoffs and argues

that reforms need to be rooted in a deeper understanding of how

labor markets work. It also argues that moving forward is urgent: the

demographic bonus will not last long. Unless comprehensive reforms take

place, most countries will not be able to sustain the future consumption of

their older populations.

The contextDependency ratios: Regions of the world 1950-2100

Three messages

1) Pension systems in LAC are impacted with problems of low coverage, inadequate pensions, fiscal unsustainability, regressivity, adverse incentives and weak institutions.

• Many of these problems arise due to poorly functioning labor markets.

• Others are in the system design

• Reforms in the 90s to move from DB to DC systems did not ameliorate these problems. And created a few problems of their own.

2) Beyond fiscal, social security systems may affect economic growth and redistribution.

3) Substantive reforms are needed.

The next wave of reforms

We believe reforms need to focus on:

• Rethinking the design of the systems with special emphasis on the fundamental parameters and the implicit redistribution

• Increasing contribution density (formality).

• Reforming and/or expanding non-contributory pensions in ways that are incentive-compatible and fiscally sound.

• Creating stronger institutions.

• Dealing with the political economy of pension reform

This presentation borrows

from 3 recent IDB publications

Pensions at a Glance, 2014Better Pensions,

Better Jobs, 2013Social Insurance, Informality

and Labor Markets, 2015

1. Social security challenges in LAC

1.1 Low coverage

1.2 Inadequate pensions

1.3 Regressivity

1.4 Rising expenditure

1.5 Incentives to informality

1.6 Weak institutions

2. Avenues for reform

THE CHALLENGE

OF PENSION SYSTEMS

IN LAC: WHAT’S NEXT

FOR REFORMS?

Only 4 out of 10 people 65+ in the region

get a “contributive” pension

Percentage of persons 65 and older with a contributive pension, 2013

Source: IDB, Labor Markets and Social Security Indicators, based on household

surveys.

* Administrative data was used to estimate coverage in these countries.

LAC-19: 39.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

HN

D

SLV

GT

M

PR

Y

DO

M

NIC

BO

L

CO

L

EC

U

ME

X

PE

R

JA

M

PA

N

CR

I

BR

A*

VE

N

CH

L

AR

G*

UR

Y*

And less than half of workers

workers contribute to a pension

Percentage of contributors out of total employed, 2013

Source: IDB, Labor Markets and Social Security Indicators

Contributions are low for those with low income,

non salaried and in small companies

Percentage of contributors out of total employed, by income decile in LAC, 2010

Source: Bosh, Melguizo, Pages (2013)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

D1 D2 D3 D4 D5 D6 D7 D8 D9 D10

Pe

rce

nta

ge

of

co

ntr

ibu

tors

Small (2-5) Medium (6-50)

Large (50 +)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pe

rce

nta

ge

of

co

ntr

ibu

tors

Salaried Non-salaried

We estimate that coverage will

also be low in the future

Ranges of the percentage of adults 65+ without

an adequate contributory pension in 2050

Source: Bosch, Melguizo, Pages (2013)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UR

Y

CH

L

BR

A

CR

I

PA

N

AR

G

EC

U

SL

V

DO

M

CO

L

VE

N

PR

Y

JA

M

NIC

HN

D

ME

X

PE

R

GT

M

BO

L

Pe

rce

nta

ge

of

65

+ w

ith

ou

t a

n

ad

eq

ua

te c

on

trib

uto

ry p

en

sio

n

IDB estimates Outside estimates


1.1 Low coverage


1.3 Regressivity





THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Replacement rates may be too low in DC

systems and too high in DB…Net replacement rate of pension systems in LAC at average years of contribution

Source: ‘Pensions at a Glance: Latin America and the Caribbean’, 2013

ARG

BOL

BRA

CHL

COL

PAN

ECU

SLV GTMHND

JAM

MEX

NIC

CRI

PRY

PER

DOM

URU

VENLAC19

USA

COL

PER

0

20

40

60

80

100

0 20 40 60 80 100

Co

ntr

ibu

tory

pe

nsio

n c

ove

rag

e p

op

ula

tio

n >

6

5 y

ea

rs o

f a

ge

Coverage for population over 65 on contributory systems and replacement rates for average salary worker

Defined

contributions

Mixed system;

Defined benefits;

Replacement rates - average wage

Those with low income receive a lump sum payment,

often at a discount, which defeats the purposeFlow of workers reaching de-accumulation stage

Note: Refers to affiliates who reached pension age during 2013.

Source: Bosch, Berstein, Oliveri and Villa, 2015.

RPM

RAIS

Pension

35%

Return of contributions (without interest)

65%

Pension

17%

Return of contributions (with interest)

82%

Minimum pension guarantee fund

1%

Another example: Colombia

Source: IDB, 2015

Transferences from affiliates not receiving a

pension to pensioners

Transferences from all

Colombians to high

income affiliates who

retire

65%

Of affiliates

<1%

30%

4%

Mill

ions o

f pesos

Married Single Married Single

Contribute per MW

RPM

during 10 years

Contribute per MW

RPM

during 20 years

Contribute per

MW RPM

during 26 years

Contribute for

5 MW RPM

during 26 years

Contribute for 25 MW

RPM during 26 years

Subsides in the RPM

(NPV of the amount the contributor gets from the system minus what she contributes

capitalized at 4%)


1.1 Low coverage


1.3 Regressivity





THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Because low coverage and population youth, public

expenditure today is still low but will grow in future


* Government pension expenditure without contributions.

Public expenditure in pensions in % of GDP and Demographics


1.1 Low coverage


1.3 Regressivity





THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Costs of social security and other

labor mandates are high in the region

Wage and non-wage costs relative to GDP per worker vs Share of salaried workers

Source: ‘The Age of Productivity’, IDB, 2010


1.1 Low coverage


1.3 Regressivity




2. Avenues for reform: Alternative

Arrangements and behavioral

THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Policy makers are faced with two objectives

Increase coverage today

Secure coverage in the future

Non-contributory Pensions

Increasing contributions

Non contributive pensions

are spreading quickly

Source: IDB Labor Markets and Social Security Indicators

* Administrative data was used to estimate coverage in these countries.

LAC-19 Total. 65.8%

LAC-19

Contributive. 39.6%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%H

ND

GT

M

DO

M

SL

V

NIC

PE

R

PR

Y

JA

M

VE

N

CO

L

ME

X

CR

I

EC

U

PA

N

BR

A*

CH

L

UR

Y*

AR

G*

BO

L

Pe

nsio

n c

ove

rag

e 6

5+

Non - contributive Contributive

Percentage of people older than 65 that get a pension, 2013

Non-contributory pensions as one of the major

innovations

Non-contributory pensions can be extremely

effective in reducing poverty in old age

0

20

40

60

80

100

19

90

19

92

19

93

19

95

19

96

19

97

19

98

19

99

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

11

20

12

rural Menor_10 Mayor_65

<10

Average

65+

Poverty in Rural Brazil ($2.5 day): 1990-2012

1991: Expansions of rural pensions

Design is important

Comlombian Tax ReformShare of workers contributing to pensions

(13 metropolitan areas) 2007-2015

Growth rate 2007-2012: 4.45% anual

Growth rate 2013-2015: 4.11% anual

Behavioral interventions

Behavioural interventions

Fuente: Bosch et al (2015)

Self-employed Salaried

Non Contributors Contributors Non Contributors Contributors

Default Options

Forcing active decisions

Comitment devices

Simplification

Matching contributions

Loteries

Reminders

Microinsurance

Enforcement

Financial Education

The MEI program in Brazil• Large proportion of labor force are self-employed: (20%) 17M

self employed

• In 2009 the MEI started to cover those self employed at ta reduced cost. Today 5% MW offering a pension that is 100% of the MW

• Today: 5 Affiliates, only 50% contributes at a given time.

The MEI program in Brazil

Increase in contributions with respect to previous month



April




May




June



The MEI program in BrazilPrices vs Reminders

What direction for reforms?

Coverage & Adequacy

• Make sure that the expansion of non-contributory pensions occurs in a sustainable & incentive-compatible way.

Trade offs possible: Targeting--Less costly, but incentives?; Universal--less incentive problems, but more costly.

Need to integrate non-contributory pensions into overall system.


It is imperative to rethink the overall design of the systems → otherwise, high future costs.

• Reexamine fundamental parameters and in a way that is compatible with the political economy

• Finance social security with sources of income other than labor taxes.

• Use more thoroughly behavioral economics (defaults, reminders, particularly for the self-employed)

• Increase enforcement

• Increase the value of social security for workers ---financial education, information, etc.


Redistribution

• Understand and redesign implicit redistribution

Reinforce institutions.

• Better policy design, regulation, supervision and fund management.

• Improve accountability

Lastly, need to establish a road map

Need to define vision with final end, but to get there a series of

reforms needed:The political economy is tricky

THANK YOU!

blogs.iadb.org/trabajo

@Carmen_Pages

@BID_Trabajo


1.1 Low coverage


1.3 Regressivity





THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Theoretical replacement ratios in the region

are not low, particularly in DB systemsNet replacement rate of pension systems in LAC

Average earners


Mixed DC DB

0

20

40

60

80

100

120

Do

min

ican

Rep

ub

lic

Mex

ico

Hai

ti

Suri

nam

e

Trin

idad

an

d T

ob

ago

Bo

livia

El S

alva

do

r

Ch

ile

Bah

amas

Bra

zil

Nic

arag

ua

LAC

26

Bar

bad

os

Ho

nd

ura

s

OEC

D

Gu

atem

ala

Bel

ize

Co

lom

bia

Jam

aica

Gu

yan

a

Pan

ama

Per

u

Co

sta

Ric

a

Arg

en

tin

a

Nic

arag

ua

Ven

ezu

ela

Ecu

ado

r

Par

agu

ay

Theoretical rates fall short: very few people

contribute all their lives, due to high rotation

Net replacement rate* of pension systems in LAC by average years of contribution


*Calculated based on average income. LAC – non-weighted average

Mixed DC DB

0%

20%

40%

60%

80%

100%

120%

0%

20%

40%

60%

80%

100%

120%

100% contribution 60% contribution 30% contribution

Turnover is high: workers are sometimes

in the system and sometimes notProbability of moving between formal and informal work during one year

Source: IDB, based on household surveys of the region

9.6

16.7 17.3

8.5

11.9 12.7

9.3

20.619.1

13.311.4 10.9

7.4 75.7 5.3

0

5

10

15

20

25

BRA COL VEN ARG MEX ECU PRY PER

formal --> informal informal ---> formal

• On average 13% of formal workers today will be informal in a year,

and 10% of informal will be formal in a year.

• It is more appropriate to talk about people “when they are formal”,

and “when they are informal”.

Turnover is particularly high

for those with lower earningsAverage years of contribution,

People aged between 25-55 years, 2012

Source: ELPS, 2012

5

14

1817

22

11

17

20

28

18

0

5

10

15

20

25

30

Until 1 MW 1-2 MW 2-3 MW 3-4 MW 4 and more MW

Year

s o

f co

ntr

ibu

tio

n

Colombia El Salvador

Low income people tend not to reach the minimum

years of contribution and not to qualify for pensions

Average of people who contribute less than 20 years (Colombia-El Salvador)

People aged between 50-55 years

Source: Estimation based on ELPS, 2012

91%

64%

41%

55%

37%

81%

64%

40%

13%

51%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Until 1 MW 1-2 MW 2-3 MW 3-4 MW 4 and more MW

Pe

rce

nta

ge

Colombia El Salvador

Social security systems

differentiate by job category

(The world of

registered in SS formality)

salaried

no registered

workers (The world of

informality)

Citizens non-salaried

no workers

Many workers in other categories:

is this exogenous?

Percentage of self employed workers, 2013

Source: IDB, Labor Markets and Social Security Indicators.

LAC-19: 29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


1.1 Low coverage


1.3 Regressivity





THE CHALLENGE

OF PENSION SYSTEMS


FOR REFORMS?

Institutions for non-contributory

pensions have not been established yetMexico, evolution of ‘non-contributory’ pensions

2002

Program begins

only for Mexico

City

2008

Program

expands to

cities < 20,000

2009

Program

expands to

cities <30,000

2012

Program

expands across

the country

2013

Retirement age

decreased from

70 to 65 years

old

2014

A law was

proposed to

duplicate

pension amount

2007

Program begins at federal

level but only for cities

<500 and adults>70

In parallel, 18 state governments created additional programs

Non Contributory pensions in LAC

Source: IDB, 2015

Country Name Benefit adjustment

Argentina Programa de Pensiones No Contributivas (Vejez) mp (d)

Bolivia Renta Universal de Vejez "Renta Dignidad" d

Brazil Benefício de Prestação Continuada mw

Brazil Previdência Rural mw

Chile Pensión Básica Solidaria de Vejez i

Colombia Programa de Protección Social al Adulto Mayor d

Costa Rica Régimen No Contributivo de Pensiones por Monto Básico d / mp

Ecuador Pensión para Adultos Mayores d

El Salvador Nuestros Mayores Derechos d

Guatemala Programa de aporte económico del Adulto Mayor dw

Mexico Pensión para Adultos Mayores d

Panama Asistencia Económica para Adultos Mayores de 70 y más d

Paraguay Pensión Alimentaria para Adultos Mayores en pobreza d / mw

Peru Programa Nacional de Asistencia Solidaria "Pensión 65" d

Uruguay Pensión No Contributiva por Vejez e Invalidez d

Venezuela Gran Misión Amor Mayor d

d: discresional

mp: minimum pension

i: inflation

mw: minimum wage

How non-contributory pensions are

adjusted has large consequences on costsCost of providing a 10% of GDP per capita pensions

(as a percentage of GDP)

Source: Bosch, Melguizo, Pages, 2013

0.0

0.5

1.0

1.5

2.0

2.5

HN

D

GT

M

NIC

BO

L

PR

Y

CO

L

VE

N

DO

M

PE

R

EC

U

ME

X

CR

I

ALC

-19

PA

N

SLV

BR

A

JA

M

CH

L

AR

G

UR

Y

Co

st a

s a

pe

rce

nta

ge

of G

DP

Cost in 2010 Cost in 2050 (inflation-indexed) Cost in 2050 (GDP per capita-indexed)

Fragmentation

Fragmented institutions – each ones sees only a part.

Absence of one single institution supervising the system as a whole.

The required information to monitor, evaluate and correct the system is not easily accessible and it is disperse among several institutions.

Lack of accountability

Potential problems

•Room to gain operational efficiency•Low diversification of investments & low returns •Under development of local capital markets limiting investment opportunities•High administration costs •Increased dispersion of functions and lack of a comprehensive view of Pension Systems•Potential governance fragility of institutions•In some cases weakness or lack of technical supervision

the challenge of pension systems - world bankpubdocs.worldbank.org/pubdocs/publicdoc/2016/5/...the...

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