The Need for a Socio-economic Approach in Actuarial

Valuations of Social Security Roberto Ham-Chande

Joint IACA, IAAHS and PBSS Colloquium in Hong Kong www.actuaries.org/HongKong2012/

Session Number: MBR5

Income security of the elderly: a tale of two extremes

1. To get a promise of future support from children, family or the State. From all options, a pension is an agreed form of support, legally validated, accepted without reluctance and claimed with a full sense of entitlement.

2. Save enough to buy goods and services during retirement.

Social Security must:

• Universal protection • Uniform and equitable benefits • Redistribute wealth in solidarity • Suitable and sufficient benefits. • Financially, economically and socially

sustainable. None of the above conditions is met. But

currently concerns and discussions are almost restricted to financial stability.

Variables in an actuarial projection

model of retirement pensions

• Econ Act Pop • Affiliation • Contribution density • Mortality • Retirement rates • Retired population • Widow survival

• Wages • Contributions • Social security credits • Amount of pensions • Administrative costs • Financial reserves • Investments returns

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• The future is not ours, to see (even for actuaries)

• Large numbers, likelihood and probability

• Assumptions in prospective models

• Teachings from history? From simplicity to complexity, from the possible to the impossible

• Warnings on projection models: seeking profits, labour unions, politics, ignorance, irresponssibility

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Scenarios pending to contrive

• Social security coverage and diversity of benefits

• Replacement levels of pensions • Sources of financing • Viability of economics • Social impacts of the pension system

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• DB pensions are a very expensive commodity. Contributions are low and have never paid for the real value of pensions

• There are pension plans with outrageous perks. Unfair and a hurdle for develop-ment

Are DC the solution?

• Lower coverage; lower pensions; risky financing; administration costs and expensive annuities

• Fund are used mainly for current government expenses

• Huge burden for public financing. DC remains paygo, but more expensive and unfair

• Lack of solidarity, unfair for women and the poor

There is a fundamental fallacy in the notion that any man is supported in old age out of his savings. He is obviously fed not by the grain which was grown by himself when he was a young man, but by the grain which is grown contemporaneously by those who are in their working days

It may be that he has accumulated means by which he can compel his support by the new generation, , , an enforceable promises to pay or other forms of wealth and property which put him in such position that he can require the new generation to support him

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• M. Dawson, 1912 • P. Samuelson, 1958 • F. Bayo, 1988 • N. Barr, 1993 • P. Orzag & J. Stiglitz, 1999 • World Economic Forum, Davos 2000 • R. Brown, 2000, 2005 • OIT, 2002 • I. Nava & RHCh, 2008 • R. Lee & G. Donehower, 2009,

Demographic dependency ratios. México, 1930-2050.

0102030405060708090

100110

65 + 4.7 5.0 5.7 6.4 6.9 6.8 6.6 7.7 9.3 12.7 19.3 29.2 40.4

0-14 73.0 75.9 77.9 90.2 97.4 87.6 69.0 53.5 39.7 31.7 27.5 25.1 24.2

1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

EDR by age and sex. México, 1970 - 2050

0

20

40

60

80

100

120

140

160

180

H M H M H M H M H M H M

1970 1990 2000 2010 2030 2050

P(0-11) P(12-17) P(18-64) P(65+)

From demographic window to demographic dividends

• Age structure suggests an opportunity to use available labor force to increase productivity and development

• This window is temporal followed by a perennial aged population

• What´s ahead? Eternal heaven? Hell forever? An intermmedium purgatory?

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• First dividend: Full employment of the big sector of population in working ages. Savings and invesment for future productivity. Education and health are fundamental

• Second dividend: Strength economic, social and political structures to generate goods and services required by EAP and retirees with long-term sustainability

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• Demographic window and dividends depict intergenerational relationships

• It is not just the ratio between workers and non workers. It is also about productivity and fairness

• Which is the weight of the relation between social classes?

• Globalization and the environment

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IMSS: Gasto en pensiones de vejez, ahorro en el seguro de vejez y cesantía, 1980-1997 (porcentaje)

Fuente: Elaboración propia con base en Memorias Estadísticas del IMSS (varios años), Memorias de Labores (varios años), Quinto Informe de Gobierno (2005).

26.57 24.73 24.5127.82 28.69 28.90

32.84 30.8827.19

53.0547.07

41.37 39.6245.10 43.74

55.4860.88

65.82

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Años

%

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

%

Gastos / Ingresos Ahorro Vejez y Cesantía / Ahorro Total de la Economía

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• Social and economic unfairness are imperilling the first dividend (like unfair social security)

• DB are canceling the second dividend • Can we rescue education and health? • The need for social and economic equity • The recent history of Asia

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Multi-pillar system.

• 0, non-contributory universal minimum pension

• 1, contributory, notional DB (up to 3 or 5 mw)

• 2, mandatory, contributory, DC (after 5 mw)

• 3, individual savings, family, health, wellbeing

Solutions have to include

• Cancel outrageous privileges • Turn 2nd pier in economic savings. • Consider long-term effects of investments

in education and health

How utopian are these proposals?

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Between utopia and disaster

• Critical conflict of vested interests. • Unawareness (or irresponsability)

about long-term social and economic consequences

• Lack of involvement of younger generations (they will be in charge of the burden).

• Actuarial, economic and social assessestments are already done

• Real world solutions are now in the political arena (Government, legislation, unions, capital, political parties).

• Full renovation of economic relations and social contracts.