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21 June, 2024

FIAP’s President addressed the sustainability of pension systems at a meeting jointly organized with the IOE

The sustainability of pension systems worldwide was the theme of the round table attended by Guillermo Arthur, President of the International Federation of Pension Fund Administrators (FIAP), jointly organized by that agency and the International Organisation of Employers (IOE) in Geneva.

In his address, Arthur stated that the PAYGO pension systems are becoming unsustainable due to worldwide demographic changes. In Europe, for example, the number of people aged 25 to 64 for every person aged 65 and over was 6.1 in 1950; 2.9 in 2020 and will be 1.7 by 2050. This means that pension amounts should drop by 41% in the next 30 years if this were the only adjustment variable for balancing the PAYGO system.

Along these lines, population aging is a phenomenon occurring all over the world, and more rapidly in Asia and Latin America. In the latter, these changes will entail a 52% drop in pension amounts over the next 30 years.

Seeking to mitigate the impact of population aging, some countries have made changes such as raising the retirement age, reducing pension amounts or increasing contributions, all to no avail in avoiding high levels of public debt.

Given the above, FIAP argued that to address the lack of sustainability of the pension systems, part of their financing must be based on individually-funded systems, in which funds are generated mainly from the return on investments, unlike the PAYGO system, which is financed exclusively through contributions. Chile, Mexico and Peru are some examples, in which more than two thirds of pension savings can be attributed to returns, and one third to workers’ contributions.

The President of FIAP also stressed that the individually-funded systems have had positive macroeconomic effects, contributing to the growth of GDP, employment and wages. Furthermore, they have shown average real returns of 6.7% per year, to December 2022, since they were implemented.

Arthur pointed out that to ensure the sustainability of pensions, some countries, especially in Latin America, have replaced or complemented their PAYGO systems with individually-funded systems. 17 countries had adopted the individual savings system by 1999, increasing to 51 by 2022, demonstrating that the global trend towards individual funding is on the rise.

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