Rafael Rofman Lead Social Protection Specialist Latin America and Caribbean Region The World Bank World Bank Core Pension Course Washington, March 2014
Outline Background: The Social Insurance schemes in Latin America The situation until the 1990s The reforms: Focus on Sustainability The situation in the mid 2000s Recent reforms: Focus on Coverage Pending challenges 2 of 28
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) 3 of 28
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 4 of 28
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 5 of 28
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 6 of 28
Some common problems: Aging 35% Percentage of population 65 and older 30% 25% 20% 15% TOTAL Latecomers Intermediate Pioneers 10% 5% 0% 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 7 of 28
Insufficient Coverage: % of labor force contributing in early 1990s 80 70 60 50 40 30 20 10 0 BO PY PE NI HO DR GU SA EC CO VE MX PA BR AR* CR UY CL ~1990 ~2000 ~2010 Source: Rofman and Oliveri, 2011 8 of 28
Insufficient Coverage: % of elderly receiving pension in early 1990s 100 90 80 70 60 50 40 30 20 10 0 HO DR SA GU PY NI CO MX PE VE PA EC CR CL UY BR AR BO ~1990 ~2000 ~2010 Source: Rofman and Oliveri, 2011 9 of 28
Generous 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 10 of 28
Increasing cost 12 Expenditures in Social Protection (% of GDP) 1990 10 8 6 4 2 0 UY BRA CHI PAN ARG BOL MEX PAR COL 11 of 28
% of GDP Declining sustainability: Implicit Pension Debt 400 350 300 250 200 150 100 50 Uruguay Argentina Mexico Bolivia Colombia Chile El Salvador Peru 0 2000 2010 2020 2030 2040 2050 Source : Zviniene & Packard, 2004 12 of 28
Consequences High costs Low Coverage Subsidies Fiscal Pressure Inequities Unsustainability Regressive Transfers 13 of 28
The reforms Main components: 1. Parametric reform 2. Introduction of DC schemes 3. Fully Funded schemes 4. Private management Several countries stopped at (1) or (2) 14 of 28
Parameters Increases in retirement age Usually by 5 yrs, to 60 or 65 Increases in vesting period In UY, to 35 yrs, in AR, to 30 yrs Increases in contribution rates (not always ) And shifting from employers to workers Reduction in expected replacement rates From 60-80% to 40-60% 15 of 28
DC schemes In some cases full shift, with no PAYG component (Chile, Peru, Mexico, Bolivia) In others, multipillar, with basic benefit financed through PAYG (Argentina, Uruguay, Costa Rica) Several countries kept full PAYG as an option 16 of 28
Funded schemes Workers contributions accumulated as financial assets In several cases, regulation pushed investment in government debt Also, regulation on minimum returns resulting in similar portfolios across managers 17 of 28
Private management Funded scheme managed by private agencies, in a competitive model Systems not really privatized, more like a concession of a public utility State remained relevant in: Financing part of the system Collecting Enforcing Guaranteeing minimums 18 of 28
The politics behind the reforms Difficult processes: In some cases (CL, PE) were approved by non democratic governments In others, long negotiations and years of debate. Two cases (NI, EC) where laws were approved but never implemented Results not always as planned, due to pressures of interest groups 19 of 28
The situation in the early 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. 20 of 28
Coverage in the 2000s: % of labor force contributing to pensions 80 70 60 50 40 30 20 10 0 BO PY PE NI HO DR GU SA EC CO VE MX PA BR AR* CR UY CL ~1990 ~2000 ~2010 Fuente: Rofman & Oliveri (2011) 21 of 28
Coverage in the 2000s: % of elderly receiving a benefit 100 90 80 70 60 50 40 30 20 10 0 HO DR SA GU PY NI CO MX PE VE PA EC CR CL UY BR AR BO ~1990 ~2000 ~2010 Fuente: Rofman & Oliveri (2011) 22 of 28
% of GDP Sustainability in the 2000s: Implicit Pension Debt 400 350 After Before the the reforms reforms 300 250 200 150 100 50 Uruguay Argentina Mexico Bolivia Colombia Chile El Salvador Peru 0 2000 2010 2020 2030 2040 2050 Source : Zviniene & Packard, 2004 23 of 28
Recent reforms: Going back from funded model? Several countries have backed up on their 1990s reforms: Argentina: Closed funded scheme in 2008 Bolivia: Closed AFPs in 2010 (but maintained funded scheme) Uruguay: Allowed some workers to switch back to PAYG El Salvador: Possible reforms in 2014? Impacts are still unclear 24 of 28
Recent reforms: Focus on Coverage New initiatives to expand coverage of the elderly, through different approaches: Pure Universal: All citizen can apply, provided some minimum qualifications (age) Targeted towards universalization : The program is targeted to those who are not receiving contributory benefits Targeted: Focus on vulnerable or poor population (using a proxy means-test) 25 of 28
Recent reforms: Focus on coverage Heterogeneous approaches: Flexibilization of contributory scheme (AR, UY, BR): Gives all beneficiaries equal rights, puts more pressure on fiscal accounts Targeted benefits: Replicates model of CCTs. Problems with targeting, lower benefits, less risky for fiscal accounts Universal benefits: Challenge to coordinate with contributory program to reduce double coverage and limit negative labor market incentives 26 of 28
Conclusion Pending Challenges (I) Coverage situation has improved in recent years, but still a key challenge in most countries Fiscal sustainability a problem in a few countries, could grow in coming years Equity concerns, due to public financing of pensions and lack of coordination of contributory with non contributory benefits 27 of 28
Conclusion Pending Challenges (II) Multipillar still a reasonable response, if well calibrated, but it doesn t provide a magic solution to main issues Bottom line: Barr s centrality of output: If GDP grows fast enough, there should be enough resources, and pension design and aging become a distribution problem 28 of 28