In this NOTE, we highlight

As evidenced on numerous occasions, the fundamental long-term challenge facing pension systems is still the provision of financially and socially sustainable pensions. To meet this challenge and ensure compliance with the purpose of pension systems, reforms of the structure, integration and complementarity of contributory and non-contributory pension programs must be carried out, regularly updating their parameters. These reforms must also adapt pension systems to the reality and evolution of labor and financial markets.

Among the most significant pension reforms recorded in pension systems in the past few decades are the reforms of the PAYGO systems to address their lack of long-term financial sustainability. Countries with these types of programs have been forced to continuously adjust pension amounts downwards, and contribution rates and official retirement ages upwards. Despite these reforms, pension expenditure and financial deficits in PAYGO systems continue to increase due to population aging, resulting in ever fewer active workers supporting an increasing number of retirees. Hence, PAYGO system pensions will tend to diminish, affecting future generations.

Given this situation, traditional pension systems in Europe, primarily defined benefit (DB) contributory pension programs, are increasingly moving towards multi-pillar pension systems, thus diversifying sources of income for retirement. In fact, individually funded private pension programs have played an increasing role in occupational, mandatory, quasi-mandatory and voluntary systems, aimed at complementing decreasing PAYGO system pensions and resolving the lack of portability of accumulated savings. This trend has been observed in the best pension systems worldwide. Even countries with political ideologies based on predominant State control, such as China and Belarus, are encouraging the development of market-oriented individual savings plans. Even Germany, the country with the oldest PAYGO system, has decided to create a fund fed by fiscal resources, but invested in the capital markets, thus relying on the returns they generate to complement the meagre pensions of its public PAYGO system.

Furthermore, many countries with PAYGO systems, in Europe and elsewhere, have introduced mechanisms for automatically adjusting the parameters of their pension systems. These mechanisms seek to implement changes in pension amounts and the main parameters of pension systems (contribution rate, official retirement age) that enable long-term improvements in terms of financial balance or pension sufficiency, generated in a less politically polluted process, based on technical factors, such as population aging, due to lower fertility rates and higher life expectancy, as well as economic and financial trends.

Total assets in private pension savings schemes in OECD countries rose significantly in the past two decades, between 2001 and 2023, from 59.0% to 82.4% of GDP. The three countries with the best pension systems in the world are also those with the highest level of assets accumulated in private savings plans.

Furthermore, European countries and countries in other parts of the world, including Latin America, are also strengthening non-contributory pensions for lower-income pensioners, financed with public budget resources.

On the other hand, the need to increase the coverage of voluntary pension plans led 14 countries (USA, France, New Zealand, Italy, United Kingdom, Canada, Brazil, Turkey, Germany, Lithuania, Poland, Gibraltar, Slovakia, Guernsey) to implement automatic enrollment between 1998 and 2024, with Ireland scheduled to do so in 2025. It is worth mentioning that there has been massive growth in government pension savings programs with automatic enrollment (Auto IRA) in the United States in the last few years, with low average opt out rates of 25%. As of June 2024, 17 states had approved such plans, managing to enroll 895 thousand workers from 217 thousand companies, saving a total of USD 1,557 million. This has recently led to the proposal of implementing Auto IRA nationwide, to complement retirement income sources and avoid sole dependence on the pensions granted by social security (PAYGO system), which is under increasing financial pressure due to demographics.

These international trends and experiences show that the creation or strengthening of PAYGO systems in Latin America would be at odds with the reforms being implemented in the rest of the world. Moreover, events in our region have evidenced that PAYGO systems have failed and have been regressive and lacking solidarity. The strengthening of contributory PAYGO programs and the weakening of individual savings systems would also have a negative effect on non-contributory pension programs because individual savings have made it possible to release public resources that previously financed the deficits of contributory PAYGO systems, using them instead to strengthen non-contributory pensions and other social programs.

The main trends and reforms to pension systems worldwide are reviewed in greater detail below, revealing the growing measures for strengthening individually funded savings as fundamental pillars for the financing of pensions, generating robust and resilient social protection systems.

Download here