• On the other hand, the report highlights the resilience of the individual savings scheme to finance retirement in the face of demographic changes experienced by the region.

For years there has been discussion about the operation of pension systems and the most appropriate financing model to achieve better pensions for citizens.

Given this scenario, the International Federation of Pension Fund Administrators (FIAP) commissioned the international consulting firm Novaster, a study (only the Spanish version available to date) that explains the advantages and disadvantages of the pay-as-you-go (PAYGO) and individually-funded pension system, which argues why the first is not financially sustainable in the context of accelerated aging that Latin America and the Caribbean (LAC) is experiencing.

Regarding the PAYGO pension system, the document titled “What they haven’t told you about pension systems in Latin America and the Caribbean” explains that, if the pension expenses of retirees are greater than the income contributed by active workers, a ‘pension deficit’ is evident, a situation that is repeated in most countries that have this model.

The study also argues that demographics play an essential role. “In 1950, only 5% of the LAC population was over 60 years of age, while currently this figure reaches almost 10% of the population.”

Furthermore, projections indicate that by 2100 the population over 60 years of age is expected to exceed 35%. “Faced with accelerated aging in the region, PAYGO pension systems benefit current generations to the detriment of future generations, which is rather an intergenerational lack of solidarity,” the report details.

In this way, the report emphasizes that “PAYGO pension systems have a design that is essentially incompatible with the demographic changes that we have been observing in our societies. Furthermore, they have presented significant inequities and are rather regressive since they have favored higher-income workers and harmed lower-income workers, who generally have sporadic contributions to social security and, therefore, low contribution densities”.

Along the same lines, it states that the PAYGO pension systems “will require repeated adjustments in the following decades to face demographic changes and maintain reasonable spending levels so as not to generate negative implications for the macroeconomics of countries, in the same way many European countries have already required it.”

On the other hand, the study highlights that individually-funded pension systems “are much more resilient since they are based on individual savings.” A very relevant factor in the amount that will be accumulated is the profitability of the funds. “On average, the real annual profitability of pension funds in the LAC region has been 4.8% in the last 10 years,” states the Novaster report. Even, “some countries estimate that between 50% and 70% of the accumulated balances in individually-funded pension systems are due to the profitability obtained by pension funds.”

Although it is argued that “individually-funded pension systems present a great opportunity to generate good pensions, they require a design in accordance with the objectives they pursue (such as adequate contribution rates and pension ages), in addition to policies that encourage labor formality in order to achieve higher contribution densities.”

Furthermore, the document points out that regardless of the type of financing of the pension system, demographic change will require adjustments to the parameters of the systems and suggests that automatic or semi-automatic adjustment mechanisms can facilitate this process.