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FIAP > Boletín – Otras Publicaciones > The present and future of pensions in Latin America and the Caribbean – IDB – November 2018

The present and future of pensions in Latin America and the Caribbean – IDB – November 2018

10 December, 2018

This publication (only the Spanish version available at the moment) analyzes 34 pension systems in 27 countries, seeking to help close the gap in existing information on the pension systems in Latin America and the Caribbean, in view of the serious risk entailed for their fiscal and social sustainability by rapid population aging.

According to the report, pensions in the region are calculated in very different ways, depending on the country and the pension system. For example, while most countries have Defined Benefit (DB) systems, where pensions are determined by a pension rule or promise, several countries have Defined Contribution (DC) systems, in which the pension depends essentially on how much the worker has saved individually, and the financial returns on those savings. In other countries, pensions are determined under the rules of a mixed system (DB + DC).

If one assumes that middle-income workers are supposed to contribute to social security continuously, without interruption (i.e., they are formerly employed throughout their working lives), the report states that workers would receive pensions (replacement rates) that would average 64.7. % and 39.8% of their last salary, in DB and DC systems respectively, with large differences between countries.

Thus, DB systems offer higher pensions. However, this is because, in the majority of these systems, the State implicitly subsidizes part of the pensions of workers (around 44%). I.e., the contributions of individuals could not finance the totality of their pensions if they depended solely on their contributions to social security and their financial returns. DC systems also offer subsidies through the minimum pension (the report estimates that, under this modality, the average worker receives a subsidy of 31% of his pension).

But what happens if the worker is not formally employed throughout his working life? The DB systems establish a minimum number of years of contributions necessary for accessing a pension benefit. If workers does not meet this minimum number of years of contribution, in the majority of countries they will not receive a pension, nor will the balance of their contributions be returned to them, which can be considered a net tax on work. In the DC systems, despite the fact that workers with sporadic contributions always have access to their individually funded contributions, they usually cannot access minimum pensions or any type of longevity insurance.

The above leads one of the main conclusions of the study: the vast majority of social security systems in Latin America and the Caribbean provide benefits that subsidize workers who contribute on a continuous basis, while punishing or failing to protect workers with sporadic contributions. Given the fact that low-income workers are the ones most likely to have sporadic contributions, this is one of the aspects of greater inequality of the pension systems in the region.

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