This study calculated the redistributive impact of pension systems in Latin America and the Caribbean (LAC) and concluded that in defined benefit PAYGO pension systems (such as Colombia and Paraguay) the three highest deciles of labor income concentrate between 70% and 95% of all subsidies. To do this, the authors first calculate the theoretical pension benefits for hypothetical workers in 25 LAC countries. They show that, on average, LAC pension systems are subsidized, providing higher pensions than workers would have obtained by investing pension contributions in a safe asset. Similarly, pension systems are designed to be progressive by offering higher replacement rates (pensions relative to earnings) for low-income workers. The authors show that, on average, in five countries pension systems provide significant subsidies to those workers who obtain a pension. However, given the high levels of informal work, in some countries these subsidies are highly concentrated among high-income workers. The variation is large between countries: the three highest deciles of labor income concentrate between 70% and 95% of all subsidies in PAYGO pension systems with defined benefits such as Paraguay and Colombia. In defined contribution systems, subsidies are much more progressive, but even so, because low-income workers do not qualify for minimum pensions, between 50% and 60% of subsidies are concentrated in the upper income deciles. Countries like Chile, with explicit subsidies directed at the bottom of the income distribution, obtain a more progressive distribution of subsidies. Due to relatively low participation rates, women have a weaker link with the pension system. They are also less likely to benefit from implicit subsidies. Finally, they show that non-contributory pensions, if well targeted, greatly improve the redistributive properties of pension systems in LAC.

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