The solidarity pillar Future challenges in the pensions reform in Chile and the Latin American perspective

1
The solidarity pillar Future challenges in the
pensions reform in Chile and the Latin American
perspective

• André Medici
• (SDS-SOC)

2
Summary

• The Chilean pensions reform
• New coverage and benefits
• New roles of the participants
• The three pillars
• The Solidarity Pillar
• Who will beneficiate from it?
• Incentives to self-employed and informal workers
• Chile in the Latin American context
• Forecasting fiscal deficits
• Covering the poor
• Other countries challenges
• Conclusions and questions

3
New coverage and benefits

• Universal rights to social security
• Reducing the risks of the elder to fall in
  poverty
• Pensions as a fair retribution to the financial
  contribution or personal effort to the society by
  any kind of paid or unpaid work.

4
New roles of the participants

• Increasing finantial contributions during the
  working age according the economic capability of
  each one
• Increasing social responsability of the managers
  of the social security system employers and
  state in order to achieve the acomplishment of
  the enrolled rights, the efficiency and the
  sustainability of the system.

5
The three pillars

• Creating an integrated solidarity pillar
• Strengthening the compulsory contributory pillar
  by the incorporation of autonomous and informal
  workers
• Developing a voluntary contributory pillar by
  incentives to contributions over the limit by the
  highest income level workers (Brazils case).
• Assuring consistance and integration among the
  three pillars.

6
The solidarity pillar

• Offering old-age, disability and survivorship
  benefits, coordinated with the benefits of the
  contributory pillar, with solidarity funding out
  of government resources, replacing the current
  welfare pension and guaranteed minimum pension
  programs.
• Substituting the current assistancial pension
  (44 K) and minimal guaranteed pension (87 K
  based on 240 months of contribution)
• Estructured by a Universal Basic Pension (UBP-
  75K mil) for people who obtain no self-funded
  pension at all from the contributory system.
• This benefit would also be available to people
  with some level of fund accumulation, and would
  be added in a decreasing proportion to the
  pension that they are able to self-fund out of
  their savings, being completely absorbed as from
  a self-funded pension of 200K.

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Who are those beneficiated from it?

• Workers with sporadic income, such as seasonal
  workers and the self-employed.
• Women will be better covered given that strong
  gender equity measures will be in place
• According to this design, the worker will always
  be able to augment his final pension by making a
  greater effort to save, while the states
  contribution will be gradually increased for
  workers with less ability to save.
• Over half of those people over 65 years of age.
• Only people belonging to the richest 40 of
  households would be excluded from the solidarity
  pillar.
• The years of contribution requirement would be
  eliminated for purposes of determining its
  benefits and replaced with the value of the
  pension self-funded by the workers savings.

8
Incentives to self-employed and informal workers

• independent workers will be fully entitled to the
  same pensions offered to employees, including the
  benefits of family allowances and the law of
  industrial accidents. They will be able also to
  join compensation funds,
• Systems will be developed to make it easier for
  self-employed and informal workers to contribute,
  adapting the current collection mechanisms to
  their work and organizational situation.
• A transition period of about 5 years is proposed
  to bring mandatory contribution into full effect
• it is proposed that the tax treatment of savings
  originating in exempt income will be adapted and
  a new system of collective voluntary pension
  saving will be created, with contributions agreed
  between workers and their employer

9
Chile in the Latin American context
10
Projected Fiscal deficit as a share of GDP
Países Déficit asociado a las reformas de pensiones y proyecciones futuras Déficit asociado a las reformas de pensiones y proyecciones futuras Déficit asociado a las reformas de pensiones y proyecciones futuras Déficit asociado a las reformas de pensiones y proyecciones futuras
Países Año inicial 2001 2020 2040
Argentina n.d. 2,5 2,3 3,6
Bolivia 0,2 3,5f 2,1 1,7
Colombia 0,9 1,6 1,0 3,4
Chile 3,8 7,2 3,4 0,5
México 0,9 0,5 0,7 0,7
Uruguay 5,1 4,0 2,1 2,5
Will the current reform revert the Chilean
expected decrease in the fiscal deficit?
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Covering the poor

• Pensions are essential for the poor elderly
  income
• In the last ten years the number of 65 and older
  without pensions coverage is increasing
• Fiscal costs of cash transfer programs could
  explode in the future if sustainable old age
  pension schemes are not timely structured.

Pensions as a share of revenue for the
population aged 65 and over by income quintiles
(around 2000)
12
Share of the population 60 years and older
receiving pensions (circa 2000)
País de personas de 60 años y más como que reciben pensiones de personas de 60 años y más como que reciben pensiones Valor promedio de las pensiones como múltiple de la línea de pobreza Valor promedio de las pensiones como múltiple de la línea de pobreza
País Urbano Rural Urbano Rural
Argentina 67 - 2.3 -
Bolivia 26 4 2.6 2.5
Brazil 62 75 3.2 1.7
Chile 61 48 3.5 2.8
Colombia 20 9 3.5 3.1
Costa Rica 40 19 3.5 3.1
Ecuador 17 - 2.0
El Salvador 18 3 2.2 1.7
Honduras 8 2 1.2 1.2
Mexico 23 7 1.3 1.6
Nicaragua 17 - 1.1 -
Panama 48 19 4.6 5.0
Paraguay 21 - 2.6 -
Dominican Republic 16 - 2.9 -
Uruguay 81 - 3.3 -
Promedio 39 21 2.6 2.0
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Pensions as a share of revenue of population 65
years and older by income quintile ( circa 2000)
Country 1st Quintile 2nd Quintile 3rd Quintile 4th Quintile 5th Quintile Total
Argentina() 86,1 93,5 88,9 88,9 67,7 76,9
Bolivia 12,8 25,6 24,8 26,9 32,6 25,6
Brazil 88,7 78,1 83,0 74,6 61,5 66,8
Chile 70,4 79,5 72,4 78,5 51,0 58,3
Colombia 54,1 60,7 56,6 65,4 67,3 65,3
Costa Rica 54,3 73,3 66,8 68,3 44,1 52,3
Dominican Republic 18,3 14,6 11,1 15,1 12,0 12,8
Ecuador 38,9 54,2 49,1 62,5 62,7 54,0
El Salvador 59,0 54,1 57,8 51,4 38,8 44,7
Nicaragua 9,0 4,5 3,4 5,5 1,9 5,3
Panama 58,2 70,6 71,2 73,9 64,5 67,3
Paraguay 23,2 26,6 29,0 34,8 21,8 24,1
Peru 8,4 14,1 16,7 13,2 17,0 15,1
Uruguay 86,3 86,0 84,7 79,7 65,4 73,4
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Other countries challenges

• Argentina Since 2001 government sectors and
  society have a inconcluded debate about the
  creation of a Universal Benefit (BU). Why?
  Fiscal constraints?
• Between 2002 and 2008 the population 65 and older
  without pension coverage is expected to increase
  from 1,4 to 2,0 millions.
• Brasil has created in the 70s a good coverage to
  old age by non contributory schemes, but the
  pension fiscal deficit is associated with that.

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Conclusions

• Chilean proposed pension reform
• Good design
• Fairness, equity and good incentives
• Challenges
• Is it fiscally acceptable by the government?
• Will the incentives work?
• Will it increase labor costs affecting the
  Chilean export drive model?
• How much will the administrative costs ammount to
  and which kind of internal competition scheme
  will be related with the new system?