Social Security Reform: The Latin American experience

1. Social Security Reform: The Latin American experience Alvaro Castro-Gutiérrez Actuary ASA (Association of Swiss Actuaries) International Social Security Consultant Geneva, 2004

2. The social security reform debate • The current situation: Is there still a debate? • The Latin American experience 2

3. The social security reform debate • Mandatory national public pension schemes: • from funding to pay-as-you-go (PAYG) • Features: • Defined benefits (DB), changing contribution rates to ease financing • Problems: • (a) vulnerability of funded schemes to economic changes 3

4. The social security reform debate • Mandatory national public pension schemes: • from funding to pay-as-you-go (PAYG) (2) • Problems: • (b) vulnerability of PAYG schemes to demographic changes • (c) Administrative issues 4

5. The social security reform debate • National pension schemes: • Reasons for problems in DB schemes • - General: • Financial and economic cost • Demographic burden • Therefore: unsustainable in the medium-term 5

6. The social security reform debate • Reasons for problems in DB schemes (2) • - Specific: • Low level of benefits provided • Limited coverage • Multiplicity of schemes 6

7. The social security reform debate • Reasons for problems in DB schemes (3) • - Specific: • Costly schemes • Low investment returns • Contribution evasion • Poor (public) administration 7

8. The social security reform debate • Current solutions: parametric changes • Raising contribution levels • Reducing benefit levels • Raising retirement age 8

9. The social security reform debate • Current solutions: parametric changes (2) • Making qualifying conditions less generous for entitlements • Promoting complementary schemes • Parametric changes are difficult to implement from a political perspective 9

10. The social security reform debate • The proposed solution: structural change by means of a: • Defined contribution(DC) • Individual accounts • Fully funded • Privately managed • mandatory pension funds system 10

11. The social security reform debate • The debate has expanded to take account of social and other aspects: • An ideological issue: the role of the state • and the public sector in society • (or the appropriate public-private mix) • A general issue: A multi-pillar system of social security protection 11

12. The current situation: Is there still a debate? • An enlarged debate: Five basic goals for pension reform • Social acceptability • Financial sustainability • Political feasibility • Coherence with economic • and labour market realities • Client-friendly management • and administration 12

13. The current situation: Is there still a debate? • An enlarged debate: The multi-pillar principle • First: mandatory, contributory DB • Second: mandatory, privately managed, individual accounts DC • Third: voluntary, privately managed, savings • A political, social and economic issue: • Which should be the relative importance • of the different pillars? 13

14. The Latin American experience • Eleven national structural reforms since 1981 • Three different approaches (or models): • Substitutive • parallel • mixed 14

15. The Latin American experience • Substitutive • Chile (1981) • Bolivia and Mexico (1997) • El Salvador (1998) • Nicaragua and Dominican Republic (2003) • Old (public) sytem  Phased out • New private system 15

16. The Latin American experience • Parallel • Peru (1993) • Colombia (1994) • Old (public) sytem  Reformed • Compete with a new private system 16

17. The Latin American experience • Mixed • Argentina (1994) • Uruguay (1996) • Costa Rica (200) • Public scheme  Basic pension • Private scheme  Complementary pension 17

18. The Latin American experience • Reform linked with political processes • Persistence of traditional problems • Resurgence of new areas of conflict • The fiscal cost of transition • Need to enhance the role of the State in • fundamental areas (regulation, monitoring, • supervision and control) of the system 18

19. The Latin American experience • Role of the actuary: Past, present and future • No participation in the reform debate (when there was a debate); social security policy makers were also absent • Not relevant role at present, but potential development for actuarial expertise • Promising future role in investment and annuity areas 19

20. The Latin American experience • Persistence of traditional problems • Limited population coverage • Non-compliance (high evasion) • Lack of confidence in the new systems due to lack of transparency 20

21. The Latin American experience • Resurgence of new areas of conflict • High transaction and administration costs • Mergers and concentration of pension • funds administrators • Limited investment portfolio diversification • Likely low levels of future benefits 21

22. The Latin American experience • The fiscal cost of transition • Public system deficit • Recognition bonds • Minimum pensions • Additional guarantees • Trade-off 22

23. The Latin American experience • Need to enhance the role of the State • in fundamental areas • Regulation • Monitoring • Supervision • Control 23