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SOCIAL SECURITY IN URUGUAY

SOCIAL SECURITY IN URUGUAY. Julio Ramos Olivera. WHY A NEW SYSTEM?. Financial collapse of the “pay as you go” system. Increase in life expectancy and its consequences. Emigration of active population. The relationship between workers and pensioners have

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SOCIAL SECURITY IN URUGUAY

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  1. SOCIAL SECURITY IN URUGUAY Julio Ramos Olivera

  2. WHY A NEW SYSTEM? • Financial collapse of the “pay as you go” system. • Increase in life expectancy and its consequences. • Emigration of active population. • The relationship between workers and pensioners have • been increasingly deteriorated. • New benefits not financed by adequate contributions. • Inadequate Management. • Bad financial investments. • Problems of moral hazard. • All three actors loose (Public sector, work force, retired).

  3. 1999 – MAIN FACTS • “Securitization & Factoring” Seminar made in June. • Publication of the book “Social Security reform: The most important achievement of the government coalition” (Author: Julio Ramos Olivera, Doctor in Law). • At the beginning of 1999 AFAP’s (PENSION FUNDS) started investments on “Private bonds”, which are fixed-rate papers issued by private companies and quote on the stock exchange. Risk rating companies evaluate the financial and economic situation of the company and the general conditions of the bond offers. • Massive adherence to the new system: important number of affiliates (530.000) and of Pension’s Fund administrated.

  4. 1999 – MAIN FACTS (Continuation) • Consolidation of the new social security system created in 1995, after many attempts to annul or revoke the law which created the new system. • Approval of the law about Securitization & Factoring, that allows AFAPs (PENSION FUNDS) to invest in infrastructure works for the country. (more than 100 million USA dollars). • Approval of the MERCOSUR’s multilateral social security agreement. • This agreement allows the affiliates of a capitalisation system to transfer their money from one to another Pension Fund, previous to their retirement, to place them in a Fund within the country where they last worked.

  5. 536.128 AFFILIATES TO THE WHOLE SYSTEM IN DECEMBER 1999 AFFILIATES 6% 13% 38% 12% 14% 17% República AFAP Integración AFAP Santander AFAP Capital AFAP Comercial AFAP Unión AFAP

  6. EFFECTIVE CONTRIBUTORS TO THE SYSTEM República AFAP 77% 299.282 CONTRIBUTORS IN DECEMBER 1999 Contributors per affiliate Average system: 59%

  7. TOTAL OF PRIVATE PENSION FUNDS DECEMBER 99: 591 MILLION OF USA DOLLARS SHARE OF EACH PRIVATE PENSION FUND 7% 7% 9% 56% 10% 11% República AFAP Integración AFAP Unión AFAP Comercial AFAP Santander AFAP Capital AFAP

  8. NET PROFITABILITY (USA DOLLARS) December 98 – December 99 MORE PROFITABLE THAN OTHER FINANCIAL INVESTMENTS

  9. 110.349 TRANSFERS TILL DECEMBER 1999 NET TRANSFERS (From March 1997 to December 1999)

  10. CHARACTERISTICS OF THE URUGUAYAN CAPITAL MARKET Total.inv/gdp Private inv/gdp Public inv/gdp • Low share of private bonds and equities. • Fragmentation at financial markets. • Public sector plays an excessively important • role. • Low internal rate of return. • Low saving and investment rates.

  11. CAPITAL MARKET FORECAST FAP: Pensions Funds G.D.P.: Gross Domestic Product

  12. INVESTMENTS CAPS BY INSTRUMENT PUBLIC SECTOR (Public Bonds): 55% minimum. • Legal Caps: PRIVATE SECTOR (Private bonds, shares and consumption credit): 30% maximum (45% when it includes mortgage bonds and certificates of deposits). • Trend in next years: 30% minimum Public Sector and 70% maximum Private Sector. • Administrative regulations (transparency since April 1998). • Investment policy of each Fund: According to risk, to solvency of the issuer, amount of the Fund, etc. • Special challenge with important and increasing amounts.

  13. 3% 2% 6% 6% 60% 24% Investments in banks Mortage bonds Public bonds Transitory cash availability Consumption credit Private bonds PENSION FUND COMPOSITION In addition to the legal constraints, there exist other limitations related to the stage of development of the market: not enough instruments and low market depth.

  14. INDEPENDENT WORKERS INCORPORATION • According to the Uruguayan social security, independent workers must contribute to the system. That is why an average of their personal contributions go to the Pension Funds. • Workers, in the so called “Shadow economy” are not integrated to the System. • There have been many attempts to make this workers pay at least a little contribution, as a way to integrate them into the system. In spite of those efforts, no positive results have been achieved until now. • Shadow economy represents 20% of the economically active population. • Its G.D.P. (Gross Domestic Product) amounts 2,200 millions USA dollars (10% of total GDP 20,000 millions USA dollars)

  15. PROJECTS AND FUTURE CHALLENGES • Modification of the minimum Special Reserve the system has as a guarantee. • To allow anticipated or deferred retirement. • To allow an extra retirement bonus. • Lower the minimum contribution of the first level • (Actually equal to USA dollars 800) • (Should be around USA dollars 500)

  16. PROJECTS AND FUTURE CHALLENGES (Continuation 1) • Consolidate the Social Security reform in all fields, trying not to go backwards in the advances made till now: • Improve the contributors/affiliates rate. • Allow more freedom for the funds investments. • Allow people with more than 40 years old, to incorporate to the new system if they choose to.

  17. PROJECTS AND FUTURE CHALLENGES (Continuation 2) • Extend the Social Security reform to cover all social security organisations. Police forces, military forces, University graduates and bank workers have their own public or private fund and administration, depending on the case. • The legal modification should maintain the characters and specificities to each group of affiliates.

  18. PROJECTS AND FUTURE CHALLENGES (Continuation 3) • Allow the Social Security funds to extend their benefits such as: programmed retirements and fractional retirements. In both cases, the benefits should be given in the same dates insurance companies can do it. • Enable the possibility that total of the individual account, in case of death without pension inheritance, can be given to legal inheritance of the dead person.

  19. PROJECTS AND FUTURE CHALLENGES (Continuation 4) • Finally we should take care of voluntarism temptations. This Pension Funds the people and the country itself has today, is one of the keys for the future. • With this Fund we can get better pensions for the retirees at the same time of working in our own sustained development. In both cases we can do it with our own financial resources.

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