D E V E L O P M E N T C E N T R E S T U D I E S THE SECOND-GENERATION PENSION REFORMS IN LATIN AMERICA BY MONIKA QUEISSER DEVELOPMENT CENTRE STUDIES THE SECOND-GENERATION PENSION REFORMS IN LATIN AMERICA By Monika Queisser DEVELOPMENT CENTRE OF THE ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came into force on 30th September 1961, the Organisation for Economic Co-operation and Develop- ment (OECD) shall promote policies designed: – to achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy; – to contribute to sound economic expansion in Member as well as non-member countries in the process of economic development; and – to contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973), Mexico (18th May 1994), the Czech Republic (21st December 1995), Hungary (7th May 1996), Poland (22nd November 1996) and Korea (12th December 1996). The Commission of the European Communities takes part in the work of the OECD (Article 13 of the OECD Convention). The Development Centre of the Organisation for Economic Co-operation and Development was established by decision of the OECD Council on 23rd October 1962 and comprises twenty-three Member countries of the OECD: Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Norway, Poland, Portugal, Spain, Sweden and Switzerland, as well as Argentina and Brazil from March 1994. The Commission of the European Communities also takes part in the Centre’s Advisory Board. The purpose of the Centre is to bring together the knowledge and experience available in Member countries of both economic development and the formulation and execution of general economic policies; to adapt such knowledge and experience to the actual needs of countries or regions in the process of development and to put the results at the disposal of the countries by appropriate means. The Centre has a special and autonomous position within the OECD which enables it to enjoy scientific independence in the execution of its task. Nevertheless, the Centre can draw upon the experience and knowledge available in the OECD in the development field. Publie´ en franc¸ais sous le titre : LA RE´FORME DES SYSTE`MES DE RETRAITE EN AME´RIQUE LATINE THE OPINIONS EXPRESSED AND ARGUMENTS EMPLOYED IN THIS PUBLICATION ARE THE SOLE RESPONSIBILITY OF THE AUTHOR AND DO NOT NECESSARILY REFLECT THOSE OF THE OECD OR OF THE GOVERNMENTS OF ITS MEMBER COUNTRIES. * * * (cid:211) OECD 1998 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre franc¸ais d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, Tel. (33-1) 44 07 47 70, Fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive, Danvers, MA 01923 USA, or CCC Online: http://www.copyright.com/. All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2, rue Andre´-Pascal, 75775 Paris Cedex 16, France. Foreword This study was carried out in the context of the Development Centre’s ongoing research into macroeconomic interdependence and capital flows. It is also an input into the OECD’s wide-ranging project into the policy implications of ageing. Other material associated with the OECD project is available through the Organisation’s internet site: http://www.oecd.org. 3 4 Table of Contents Preface ....................................................................................................................... 7 Executive Summary.......................................................................................................... 9 Chapter 1 The Crisis of Old Age Security in Latin America ....................................... 17 Chapter 2 Adapting the Chilean Model: The Second-Generation Pension Reforms in Latin America............................................................. 23 Chapter 3 Financing the Transition towards Funded Systems ................................. 39 Chapter 4 Reform Results and Performance of the New Systems............................. 55 Chapter 5 Challenges for Pensions Policy in Latin America.................................... 71 Chapter 6 Lessons for OECD Countries...................................................................... 85 Annex 1 Pension Reform in Peru............................................................................... 89 Annex 2 Pension Reform in Colombia ..................................................................... 97 Annex 3 Pension Reform in Argentina......................................................................107 Annex 4 Pension Reform in Uruguay .......................................................................117 Annex 5 Pension Reform in Mexico.........................................................................123 Annex 6 Pension Reform in Bolivia .........................................................................129 Annex 7 Pension Reform in El Salvador ..................................................................133 Bibliography....................................................................................................................137 5 6 Preface Latin America is becoming a laboratory for social security reforms. More than a decade after Chile’s move from a public, pay-as-you-go to a private, funded pension system, seven Latin American countries have reformed their pension systems. This study analyses and evaluates the pension reform experiences of Argentina, Peru, Colombia, Uruguay, Mexico, Bolivia and El Salvador. It provides a detailed description of the second-generation pension reforms carried out in these countries, evaluates the first years of operation of the new systems and outlines the remaining problems and challenges. Analysis of Brazil’s important effort to introduce comprehensive pension reform is not included in the study because the system structure had not yet been finalised at the time of writing. The basic, common feature of second-generation pension reforms in Latin America is a greater role for funded, privately managed pensions. The move towards more funding, under discussion in several OECD countries, is one possible way of confronting the effects of ageing populations on pay-as-you-go pension systems. Therefore, the Latin American reform experience is valuable not only for other developing countries about to embark on pension reform but also for policy makers and pension experts in OECD countries and transition economies. The second-generation pension reforms carried out in Latin America illustrate that a move to more pension funding is feasible in a democratic context and that the transition to a fully or partially funded pension system can be financed in various ways. The study also points out that, given the high operational costs of the Latin American model, countries planning to reform their pension systems should carefully consider the appropriate administrative structure. Finally, the study underlines the importance — for OECD countries and transition economies as well as developing countries — of arresting the financial deterioration of the pension systems early, instead of waiting for the systems to collapse. This study was carried out under the Development Centre’s research project on “Macroeconomic Interdependence and Capital Flows”, and serves as an input to the OECD’s Ageing Populations Project. It benefited from close co-operation with and support from policy makers, in particular pension supervisors, as well as pension experts in all of the Latin American second-generation reform countries. Jean Bonvin President OECD Development Centre August 1998 7 8 Executive Summary Introduction Latin America has proven to be the most dynamic and innovative region in the area of pension reform. More than a decade after Chile moved from a public pay-as- you-go to a private funded pension system, seven more countries in Latin America have reformed their pension systems. No two of these “second-generation” pension reforms are alike but their basic common feature is a greater role for funded, privately managed pensions. In the design of their new systems, the individual countries have made different choices depending on their initial conditions such as the pension systems’ financial viability, the fiscal situation as well as the political environment in which pensions were reformed. The varied nature of Latin America’s recent pension reforms and their mixed results hold valuable lessons for OECD and non-OECD countries alike. Reform Models The second-generation countries can be grouped according to the size and maturity of their public pension systems. Apart from Chile, Argentina and Uruguay have the oldest social security systems in the region. In both countries, the age profiles of the population are comparable to those of Western European countries and population growth is low or negative. Thus, by the 1990s, their pay-as-you-go systems had reached high degrees of maturity. With increasing old-age dependency ratios and a rapidly deteriorating ratio between contributors and affiliates, both countries were faced with growing deficits in their pension system. The debt implicit in the pay-as- you-go system was estimated to be more than twice the GDP in Uruguay and thus substantially higher than in most OECD countries. Compared to Chile, pension reform had to be undertaken under much more difficult fiscal circumstances, since neither Argentina nor Uruguay was running a budgetary surplus. Thus, a full transition to a funded system was not a realistic option due to the extremely high costs involved. Furthermore, in both countries the political 9