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FEATURE STORY

Latin America: Increase in Number of Retirees with the Right to a Pension

March 13, 2014

STORY HIGHLIGHTS
  • Around 11 million adults over age 65 who had been excluded from pension systems were able to receive benefits.
  • In Latin America there are approximately 290 million people of working age. Fifty-five percent of them do not contribute to any pension system
  • One solution to this problem would be to improve labor market formality to ensure that workers make regular contributions.

Throughout her life, Blanca Guido worked many jobs – child care provider, secretary, hotel employee – but since she never made significant contributions to a pension system, she had to work until age 70.

When she finally decided it was time to retire, she filed some paperwork with the Argentinian government agency to receive a pension equivalent to the amount of money she contributed. However, if it were not for financial support from her daughter, she would have difficulty making it to the end of the month.

Does this story sound familiar?

While Blanca’s situation serves as an example of the improvements in Latin American pension systems, it also reflects a troubling reality: of the 50 million older adults in the region, some 40% do not have the right to a pension because they have not made contributions throughout their working life.

A quick calculation reveals that in Latin America today, there are approximately 290 million people of working age. Fifty-five percent of them, in other words, 160 million, do not contribute to any pension system.

Apart from their statistical interest, these data suggest that many Latin Americans no longer receive income when they reach retirement age. In many cases, this forces them to keep working beyond a reasonable age, spend their savings or depend on the generosity of their families.

But relying on families has an economic impact, particularly if they have limited resources, because they must allocate some of their income to the care of their elderly members.

“One solution to this problem would be to improve labor market formality to ensure that workers make regular contributions. At any rate, to resolve the situation of many older adults requires moving beyond traditional contributory pensions,” says Rafael Rofman, World Bank pension expert and author of the study Beyond contributory pensions in Latin America and the Caribbean.

The expert observes that thanks to economic growth over the past decade, formal employment increased, and with it, more people entered contributory systems. Currently, 45% of workers contribute to a pension system, as compared with 35% 15 years ago.

These winds of global economic change convinced Latin American governments of the need to establish reforms in pension systems. As a result, approximately 11 million adults over age 65 who had been excluded from such systems were able to receive benefits.

Open Quotes

To resolve the situation of many older adults requires moving beyond traditional contributory pensions Close Quotes

Rafael Rofman
World Bank pension expert

Universal or selective pensions?

Policy strategies developed in the region in recent years established three different lines of action.

A first group of countries, comprised of Argentina, Brazil, Chile, Panama and Uruguay, opted to include older adults who during their working life did not make contributions to pension systems. Common measures included facilitating entry into the contributory system by relaxing some requirements or simplifying procedures.

Other countries – such as Colombia, Costa Rica, Ecuador, El Salvador, Mexico, Paraguay and Peru–, which did not have the necessary resources, decided to focus on vulnerable groups and granted pensions to the most disadvantaged citizens through their own social security institutions.

A third group is formed only by Bolivia and Trinidad and Tobago. Their strategy has been to grant pensions to all older adults, regardless of whether or not they worked.

 “These strategies appear to be working and the overall situation is improving. However, two clear challenges remain: one is political, social and design consolidation whereas the other is fiscal sustainability, in other words, they have to be paid,” says Rofman.

Given that these programs were launched in a favorable economic context, one of the most pressing challenges is to guarantee pensions in less favorable economic situations.