Pensions are Latin America’s ticking time bomb

. Jan 13, 2020
pension systems latin america Photo: Francisco J. Ramos Gallego/Shutterstock

As pointed out by the Inter-American Development Bank (IDB), Latin America is a region aging at a fast and unprecedented pace. Right now, about 11 percent of the region’s population is aged over 60. And while that’s much less than Europe (24 percent) or North America (21 percent), the Latin American rate will be—in just three decades’ time—similar to what we see now in countries such as Germany or Switzerland.

According to data from the U.S. National Institute on Aging, three South American countries—Colombia, Brazil, and Chile—figure among the top 20 fastest-aging nations.

So, how are countries preparing themselves for this new demographic reality?

</p> <p>As signaled by a <a href="">2016 report</a> commissioned by Argentinian universities and the IDB, entitled &#8220;Social Pensions and Poverty in Latin America,&#8221; pension systems&#8217; coverage levels remain very low, with only 29 percent of senior citizens receiving retirement benefits. This explains why senior citizens are so prone to falling into poverty. The study, authored by IDB researcher María Laura Oliveri, points out that 16 percent of Latin Americans over 65 years old are below the poverty line, with another 30 percent being in a situation of &#8220;vulnerability.&#8221;</p> <p>In Latin America, many governments have chosen not to tackle the issue, precisely out of fear of social unrest.</p> <div class="flourish-embed" data-src="visualisation/1226344"></div><script src=""></script> <h2>Brazil&#8217;s pension reform</h2> <p>Under Jair Bolsonaro, <a href="">Brazil approved a pension reform</a> of its own in October 2019, establishing a minimum retirement age for the first time—62 for women, 65 for men—aiming at lowering the deficit of the pension system.&nbsp;</p> <p>The reform will allow for over BRL 800 billion in savings for the government over the next ten years. Moreover, it is a signal to investors that Brazil is committed to more austerity.</p> <div class="flourish-embed" data-src="visualisation/429309"></div><script src=""></script> <h2>Argentina</h2> <p>Under former President Mauricio Macri, Argentina chose not to carry out comprehensive reforms to its pension system, with the government instead opting for <a href="">gradual changes</a>. In 2017, the country changed into how benefits are adjusted over time, pegging rises to inflation—which means much lower increased than before. However, unlike Brazil, Argentina already had a minimum retirement age of 60 years for women, and 65 for men. </p> <p>With the changes, the Macri administration expected to save up to BRL 18 billion in 2018. </p> <p>But pension reforms are always very contested and a source of public opposition, and Mr. Macri&#8217;s approach of gradually making changes created <a href="">too much political tension</a>. The move sparked fury among workers, and tens of thousands of Argentinians protested in front of the Congress building in Buenos Aires. In October 2018, voters chose not to give Mr. Macri a second term, and his successor, Alberto Fernández, is not keen on pursuing the same pensions agenda.</p> <h2>Chile&#8217;s much-hated pension system</h2> <p>The Chilean pension system is based on capitalization model, which involves the use of individual savings accounts to pay for retirement benefits. This model has been the subject of growing dissatisfaction, as individual savings accounts have not produced returns sizeable enough for retired persons to live on.&nbsp;</p> <p>The system is ill-suited for a country where informal work accounts for nearly half of all labor, and the average pensioner in Chile today receives less than the minimum wage, with nine out of ten retirees receiving only 60 percent of the minimum wage—currently at USD 450.</p> <p>According to Guillermo Larráin, a professor at the University of Chile, that’s because <a href="">saving 10 percent of their salary</a>, as Chileans do, is not enough. In Brazil, for instance, workers contribute with 8 to 11 percent of their salaries—which is complemented by the employer, who deposits the equivalent of 20 percent of the salary.</p> <p>Suicide rates among elderly citizens have <a href="">reportedly</a> sky-rocketed in recent years. In the closing months of 2019, <a href="">Chileans took to the streets</a> against inequality—placing the pensions system as their main grievance.</p> <h2>Mexico</h2> <p>One year into his term, <a href="">left-wing President Andrés Manuel López Obrador</a> (also known as AMLO), has promised to reform Mexico&#8217;s pension system numerous times.&nbsp;</p> <p>The most urgent changes, according to his administration, are the contribution rate—which AMLO wants to increase from the current 6.5 percent—as well as the minimum age for retirement, which he wants to push to the 60-65 range. But these moves can be risky, according to IDB senior labor market expert David Kaplan, as they could impact poorer populations the most.</p> <p>Another problem for Mexico is the low coverage rate, at only 30 percent. The last pension reform in the country came in 1997, as there was not enough money to pay for benefits. The solution found by the government back then was adopting a capitalization model similar to the likes of Chile&#8217;s.</p> <p>It has created many problems, similar to the ones found in Chile. Mexico&#8217;s informal workforce accounts for 60 percent of jobs. According to the Mexican Association of Retirement Fund Administrators (Amafora), until 2017, the amount of money poured into the pension system increased by MXN 2.9 billion (USD 148 million), a 14.3-percent share of the GDP.</p> <p>With that in mind, AMLO’s administration expects to launch a new reform in 2021.</p> <h2>Peru and Colombia</h2> <p>The capitalization method landed in Peru in 1992, two years after dictator Alberto Fujimori’s rise to power. Just like in Chile, the Peruvian private experience reveals a low return for retired workers, who can choose between saving 13 percent of their gross income to the public pension system or 10 percent to a private fund. Experts say that the system is highly confusing and doesn&#8217;t allow Peruvians to save enough for their retirement.</p> <p>In Colombia, labor informality is also the root behind subpar pensions. With few contributors, 70 percent of the working class in under a serious risk of being out of coverage, according to the country&#8217;s Labor Ministry. President Ivan Duque already promised a &#8220;comprehensive-but-not-drastic&#8221; reform. But as his administration faces nationwide protests, Mr. Duque is unlikely to bring such an explosive matter to the table.

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Lucas Berti

Lucas Berti covers international affairs — specialized in Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.

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