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Reforming Pension Systems in Latin America and the Caribbean: some thoughts Angel Melguizo Inter-American Development Bank Prepared for the XXXVIII Meeting of the Network of Central Banks and Finance Ministries Washington DC - April 17-18, 2013
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Main Messages Pension Savings are Low and Unequal Pension-related Fiscal Challenges are High and Diverse Principles and Contents of a Reform Roadmap Pension Savings and Infrastructures
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Pension Savings are Low and Unequal There are many Americas Latinas… but overall, pension savings levels are low and concentrated among the dependent high-income workers, irrespectively of the pension scheme Workers contributing to pension schemes by income decile (% total population 15-65 years, LAC-18 sample, circa 2010) Source: IDB, based on nation household surveys
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Pension Savings are Low and Unequal Middle-class workers (i.e. workers in the middle of the income distribution) are informal in some dimensions: no labour contract, no affiliation/contribution Distribution of non-agricultural middle-income workers by occupation (% total workers 14-64 years) Source: Da Costa et al. (2011) and Carranza et al. (2012)
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Pension-related Fiscal Challenges are High and Diverse Low pension contributions are a leading indicator of short-term fiscal liabilities, illustrated by the slippery slope of non- contributory pension Source: HelpAge and IDC, circa 2012 Fiscal cost of non-contributory pensions (Percentage points of GDP, circa 2012)
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Pension-related Fiscal Challenges are High and Diverse Structural pension reform (from DB to DC) can help, but are not the panacea: transition costs tend to be heterogeneous (nature and timing), high and persistent Source: Melguizo et al. (2009) Transition deficit of the Chilean civil pension system (Percentage points of GDP)
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Principles and Contents of a Reform Roadmap Principles Global: old-age pensions, and disability and survivors, health, unemployment Integral: coordination of pillars Simple Transparent: poverty vs. insurance Efficient: savings, formal labour participation Adapted to institutions: implementation Fiscally sustainable
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Principles and Contents of a Reform Roadmap Tools Implementing an universal pension: anti-poverty citizen’s pension, anchored on strict rules (coverage, indexation) Unlinking pension savings from the labour market: progressive and subsidised social contribution cuts (exemption for lower- income workers) plus Regulating voluntary pension schemes: based on matching- contributions Supervising and educating Innovating: financial incentives and behavioural channels
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Pension Savings and Infrastructures Structural reforms (well functioning fully-funded DC) and parametric reforms (DB with reserve funds) could contribute to close the infrastructure gap.. not yet there Source: Dos Santos, Tuesta and Torres (2011) Pension funds investment in infrastructures (Percentage points of GDP, 2011)
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Pension Savings and Infrastructures Why this – so far- limited contribution? General Lack of confidence in long-term investment Infra-development of concession mechanisms Lack of adequate financial instruments Pension regulation Prohibitions, quantitative restrictions, and rules on liquidity, valuation and ratings. Performance regulation Technical: Risks Sovereign risk of the portfolio Concentration (indirect investments)
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Summing up Pension Savings are Low and Unequal –Pension savings reflect (and impact) the functioning of the labor markets (more than their DB/DC nature) –The middle is missing: middle-class workers are informal Pension-related Fiscal Challenges are High and Diverse –Short-term: the slippery slope of non-contributory –DB-to-DC reforms are not the panacea: transition design matters Principles and Contents of a Reform Roadmap –Relying less on the labour market –Innovating in tools; anti-poverty and pro-insurance Pension Savings and Infrastructures –A win-win association, yet to be materialised
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http://www.iadb.org The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the Inter-American Development Bank, its Board of Directors, or the countries they represent. The unauthorized commercial use of Bank documents is prohibited and may be punishable under the Bank's policies and/or applicable laws. Copyright © 2013 Inter-American Development Bank. All rights reserved; may be freely reproduced for any non-commercial purpose.
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