Countries in Latin America have been ahead of countries elsewhere in undertaking the transition from pay-as-you-go defined-benefit pension plans to fully funded, defined-contribution pension plans. Now they must address complementary reform in the banking, insurance, and securities markets.
Because of better health and higher standards of living, people are living longer. By 2030, more than 16 percent of the world's population will be older than 60, compared with 9 percent today.
As a result, pension systems will need reform. Most current systems have substantial unfunded liabilities that will impose significant financial burdens on future generations without providing adequate protection for older individuals and lower-income workers.
Pension reform is inevitable because of demographic imperatives and because many pension systems are financially unsustainable. Unfunded public pension systems pose political risk if promises to future retirees cannot be met. Pension reform is both technically and politically complex but more and more countries are beginning to address the problem. The question is whether quick fixes will be adopted or sustainable changes that will benefit the macroeconomy and protect elderly and lower-income citizens.
Quick fixes—typical in many economies—generally involve changes in eligibility (such as retirement age), changes in the rate of contribution or the population of workers on which contributions are calculated, or changes in the structure of benefits.
Countries in Latin America have been ahead of other regions in undertaking major reform from pay-as-you-go defined-benefit pension plans to fully funded, defined-contribution pension plans. Because of the successful Chilean pension model, a notable number of Latin American countries have undertaken deep pension reform. Aiyer highlights reform efforts in a sample of countries: Argentina, Brazil, Chile, Mexico, and Peru.
Vigilance is still needed, says Aiyer. Effective oversight is essential, and so is complementary reform in the banking, insurance, and securities markets. In capital markets, for example, regulation must be strengthened and the requirement that pension fund investments be made only in government-related securities must be eliminated. New types of insurance must be made available and there must be increased competition among insurance providers.
More work must be done but the region's pension systems have started on the right course.
This paper—a product of the Technical Department, Latin America and the Caribbean Region—is part of a larger effort in the region to promote financial sector and capital market reform. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Patricia Lee, room I5-011, telephone 202-473-7805, fax 202-676-1733, Internet address plee2@worldbank.org. (22 pages)
The full report is available in PDF format.