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back to index backGLOBALtalk December,  2014


Latin America – Pensions: Addressing the Ticking Time Bomb

Under current conditions, a bone-chilling 60 percent of individuals who will reach retirement in 2050 will not be able to receive a contributory pension and will not have enough savings to live out of poverty. Carmen Pagés-Serra offers a solution to the problem.

The majority of pension systems in Latin America and the Caribbean are not fulfilling their objectives. Despite recent attempts to increase pension coverage, four out of 10 Latin Americans over the age of 65 do not receive a pension, and of those who do, a large proportion receives a pension below $10 a day. Moreover, a number of social security systems are under financial strain due to the lack of alignment between contributions and payments. All this suggests that pensions systems are ineffective at eradicating poverty, or at maintaining the standard of living of retired Latin Americans.

Sweeping the problem under the rug, or pushing the solution into the future, will only make matters worse, as the absence of savings for retirement has serious social, fiscal, political and economic consequences. The population over the age of 65 in Latin America and the Caribbean will triple in size in a few decades, reaching nearly 140 million people in 2050. Additionally, retirees will live longer. With fewer children to rely on, elders will need more resources to live on after retirement. Yet, we estimate that given current trends, 50 to 60 percent of those individuals who reach retirement – amounting to 66 and 83 million people in total – will not have had paid enough to receive a contributory pension, and will not have enough savings to live off. If nothing is done soon, these fast-approaching demographic changes will jeopardize recent gains in inequality and poverty reduction. They will bring substantial political and fiscal challenges, since retirement-age people who will lack a contributory pension will account for more than 20 percent of the electorate.

The labor market is the main cause of low pension coverage, and it is at the heart of the solution. About six out of every 10 workers are not contributing to a pension through their jobs. This means that 130 million workers do not make social security contributions, and are part of the informal economy. The good news is that informality is not an incurable disease. It is largely shaped by state-provided incentives in the labor markets, by the design of the social security system, and by the value that firms and workers place on the benefits of formality. All these issues can be addressed with the right interventions.

In our recent book, Mariano Bosch, Ángel Melguizo and I argue that universal pension coverage is feasible by promoting universal non-contributory pensions. Universal pensions have two advantages. They are easier to manage than targeted schemes, which require complicated targeting instruments. They also distort incentives less than formats that require people to remain poor, or not to have a contributory pension in order to receive a non-contributory one. To be fiscally sustainable, such pensions would have to be set quite low (enough to eradicate old-age poverty), be taxable, and be adjusted over time with a rule that takes into account the population aging. In addition, countries will have to step up efforts to bring more workers into formality, so enough savings are generated. We argue that a combination of contribution subsidies for low-income workers, better enforcement mechanisms, and innovations that make contributions automatic for the self-employed would go a long way to increase savings. Lastly, many countries will need to reduce the gap between contributions and benefits as current imbalances will be unmanageable as the population rapidly ages.

About the author
*Carmen Pagés-Serra is chief of the Labor Markets and Social Security Unit at the Inter-American Development Bank (IDB).

The views expressed in this article are her own.

Source: LatinTrade - GAI




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