Social Security Reform:

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Social Security Reform The Latin American
experience
Alvaro Castro-Gutiérrez Actuary ASA (Association
of Swiss Actuaries) International Social Security
Consultant Geneva, 2004
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• The social security reform debate
• The current situation Is there still a debate?
• The Latin American experience

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• The social security reform debate
• Mandatory national public pension schemes
• from funding to pay-as-you-go (PAYG)
• Features
• Defined benefits (DB), changing contribution
  rates to ease financing
• Problems
• (a) vulnerability of funded schemes to economic
  changes

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• The social security reform debate
• Mandatory national public pension schemes
• from funding to pay-as-you-go (PAYG) (2)
• Problems
• (b) vulnerability of PAYG schemes to demographic
  changes
• (c) Administrative issues

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• The social security reform debate
• National pension schemes
• Reasons for problems in DB schemes
• - General
• Financial and economic cost
• Demographic burden
• Therefore unsustainable in the medium-term

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• The social security reform debate
• Reasons for problems in DB schemes (2)
• - Specific
• Low level of benefits provided
• Limited coverage
• Multiplicity of schemes

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• The social security reform debate
• Reasons for problems in DB schemes (3)
• - Specific
• Costly schemes
• Low investment returns
• Contribution evasion
• Poor (public) administration

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• The social security reform debate
• Current solutions parametric changes
• Raising contribution levels
• Reducing benefit levels
• Raising retirement age

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• The social security reform debate
• Current solutions parametric changes (2)
• Making qualifying conditions less generous for
  entitlements
• Promoting complementary schemes
• Parametric changes are difficult to implement
  from a political perspective

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• The social security reform debate
• The proposed solution structural change by
  means of a
• Defined contribution(DC)
• Individual accounts
• Fully funded
• Privately managed
• mandatory pension funds system

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• The social security reform debate
• The debate has expanded to take account of
  social and other aspects
• An ideological issue the role of the state
• and the public sector in society
• (or the appropriate public-private mix)
• A general issue A multi-pillar system of social
  security protection

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• The current situation Is there still a debate?
• An enlarged debate Five basic goals for pension
  reform
• Social acceptability
• Financial sustainability
• Political feasibility
• Coherence with economic
• and labour market realities
• Client-friendly management
• and administration

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• The current situation Is there still a debate?
• An enlarged debate The multi-pillar principle
• First mandatory, contributory DB
• Second mandatory, privately managed,
  individual accounts DC
• Third voluntary, privately managed, savings
• A political, social and economic issue
• Which should be the relative importance
• of the different pillars?

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• The Latin American experience
• Eleven national structural reforms since 1981
• Three different approaches (or models)
• Substitutive
• parallel
• mixed

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• The Latin American experience
• Substitutive
• Chile (1981)
• Bolivia and Mexico (1997)
• El Salvador (1998)
• Nicaragua and Dominican Republic (2003)
• Old (public) sytem ? Phased out
• New private system

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• The Latin American experience
• Parallel
• Peru (1993)
• Colombia (1994)
• Old (public) sytem ? Reformed
• Compete with a new private system

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• The Latin American experience
• Mixed
• Argentina (1994)
• Uruguay (1996)
• Costa Rica (200)
• Public scheme ? Basic pension
• Private scheme ? Complementary pension

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• The Latin American experience
• Reform linked with political processes
• Persistence of traditional problems
• Resurgence of new areas of conflict
• The fiscal cost of transition
• Need to enhance the role of the State in
• fundamental areas (regulation, monitoring,
• supervision and control) of the system

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• The Latin American experience
• Role of the actuary Past, present and future
• No participation in the reform debate (when
  there was a debate) social security policy
  makers were also absent
• Not relevant role at present, but potential
  development for actuarial expertise
• Promising future role in investment and annuity
  areas

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• The Latin American experience
• Persistence of traditional problems
• Limited population coverage
• Non-compliance (high evasion)
• Lack of confidence in the new systems due to lack
  of transparency

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• The Latin American experience
• Resurgence of new areas of conflict
• High transaction and administration costs
• Mergers and concentration of pension
• funds administrators
• Limited investment portfolio diversification
• Likely low levels of future benefits

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• The Latin American experience
• The fiscal cost of transition
• Public system deficit
• Recognition bonds
• Minimum pensions
• Additional guarantees
• Trade-off

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• The Latin American experience
• Need to enhance the role of the State
• in fundamental areas
• Regulation
• Monitoring
• Supervision
• Control

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