The Uncertain Balance of Social Security

Reforms to its social security systems are underway in two countries in Latin America, they hope to make up for the historic shortfails faced by the population to access health care or pensions systems. But good intentions aside, the problem could be beyond what any law may be capable of solving.

By Suhelis Tejero

For a few weeks, France’s streets have been hit by popular protests with pungent claims aimed at President Emmanuel Macron’s reform to the pensions system, which pushes the retirement age from 62 to 64 years of age by 2030. It is not entirely novel: Other European nations have deferred the retirement age as a way to solve the funding crisis of the pension scheme, fueled by the prompt population aging.

On this corner of the planet, sustainability issues of social security systems are also a concern and have aggravating circumstances. Even though the Latin American population is not aging at the same rate as Europe’s and other developed countries, it is happening at a higher speed than some years ago. To make matters worse, the rate of informal work in Latin America is around 50%. Meaning that one of two employees has a precarious job, gets 

lower wages, has limited social protection, and basically no benefits.

The drama of informal work, a constant in the Latin American labor market, lies in the fact that half of the population is unprotected and unable to contribute to the social security system. With this level of informality, the chances of funding health care and pension systems is limited. That sets off the alarms towards the future, a higher aging rate worsens an already complicated outlook. 

This scenario puts enormous pressure on the health care system because as populations get older the health demands increase. Likewise on the pensions system, which has also failed at finding a sustainable road. 

The Public-Private Dilemma

Pensions systems in Latin America, both public and private, have had constant sustainability issues. The Venezuelan state scheme is the most extreme: employees contribute to pay the current pensions through a public distribution system, yet the pension barely amounts to 5.35 dollars per month. Chile’s exemplary private management funds have become a model for the region, nevertheless, its results led to protests in 2018.

Now, two Latin American countries are attempting to undertake reforms to hopefully improve  the coverage levels of their pension systems. Chile and Colombia have embarked on the task of solving their pension dilemmas; both Gabriel Boric and Gustavo Petro, leftists, seem to be keen on trying new models. 

Boric suggests three main points: One, social security savings and individual savings accounts (which operate through private administrators of pension funds, known as AFP) shall remain private. Two, those resources can’t be expropriated. And three, contributors are free to choose which fund to invest their savings in. All of the above in a mixed system in which public and private institutions are bound to operate under equal conditions. 

“We want to leave behind an external system that hasn’t fulfilled the expectations and that has well-known failures,” the Chilean president stated in November when he introduced his pensions reform.

Money is not Enough 

The failed model that Boric refers to is based on the existence of AFP, financial institutions that collect, manage and invest employees’ contributions. Part of each employee’s salary (destined to build up their retirement resources) is saved in individual capitalization accounts. As reasonable as it sounds, the truth is that upon retirement, Chileans have ended up with pensions that are slightly equivalent to 30% of the salaries they used to have as employees.

Recently, economist Juan Ramon Rallo explained that the problem with low pensions in Chile is due to the fact that the mandatory contribution rate of each employee is set at 10%; in Spain, for instance, it is 26%. “Low pensions are not low as a result of the system’s inefficiency. (…) In Chile, people save relatively little, so if some Chileans fail to save that 10% throughout their working life they can end up with meager financial equity,” he said in November. 

Chile, with its low pensions, also faces problems that are commonplace in Latin America: increased informal work and a faster population aging. “Without a doubt, the main challenge of pension systems in Latin America is population aging,” says Oliver Pardo, an expert in social security.

That is why the issue goes beyond public or private models. A study of the CAF (the Development Bank of Latin America indicates that more than 8% of the population of the subcontinent is 65 years old or above, but that figure will rise to 17.5% by 2050. Furthermore, it will be a third of the population by the end of this century; more and more pensioners will rely on their pension.

Greater Influence of the State

In the other proposal to reform the pensions system, Colombia’s, the State has greater influence. At least that is what can be concluded from the bill that President Petro has submitted to the Congress and that is based on a pillar system that he had presented in his presidential campaign. 

If it passes, it will completely flip the relationship between the State and the private institutions, at least in terms of the savings. Petro’s reform will compel contributors making up to three times the current legal minimum wage to choose the state-run company Colpensiones to save their pension, this will transfer 84% of Colombian employees to the public scheme, a percentage that currently favors the private sector. 

Before becoming president, Petro had the idea of implementing mechanisms of solidarity distribution to have the system’s contributors fund the pensions of current pensioners. 

According to Petro, Colombia does not have a pension system but a system of “banking profits,” referring to the model that allows private administration funds to freely invest employees’ resources.

As Pardo asserted, “the normal thing is to have a public distribution system and a savings scheme, but the savings scheme does not necessarily need to be private. That is an element of this pension reform, it comprises public savings.” But according to the expert, the key is for employees to have a savings scheme in place and not just to fund current pensions (the  distribution system) because “our population is aging.”

The study of the CAF shows that states in Latin America spend an average of 4.3% of the GDP (gross domestic product) in pensions, more than what comes into the health care system, which barely amounts to 4.1% of the GDP.

Health in the face of Financial Constraints

Health, the other component of the social security system, is also struggling to find funds. In Latin America, the health component is based on public resources and it depends on the resources that states collect through taxes. That 4% of the GDP allocated to the health systems in the region is below the 6% recommended by the Pan American Health Organization (PAHO).

The structural crisis of the system has resulted in users paying double to fund their health care: through their taxes and from their own pocket. The ​​ECLAC estimates that households cover 32.3% of the total Latin American health expenditure, a reality that is critical for low-income populations. 

And in that underfunded system, some nations leave its management to an unregulated private sector that demands copayments that are too onerous for the poorest. Last year, the PAHO declared that inequity in access (which became more evident in the COVID-19 pandemic) forced many countries in Latin America to substantially transform their health systems. But only a few have embarked on the process. Only Chile and Colombia, alongside Mexico, intend to reform their health care systems.

Petro’s proposal is not without polemic. The current system, that some consider has been successfully managed by private entities, would turn into a public and universal model whose fiscal sustainability raises concerns. A similar idea will be proposed by Boric at the end of this year but with an additional commitment of progressively increasing the State’s contribution to the health care system. In the meantime, Mexican president, Andres Manuel Lopez Obrador, has pushed a program to guarantee healthcare to those who are not covered by social security. 

Everyone seems to have good intentions. Although in some cases, projects are permeated by the weight of ideology. But beyond that, having the health and pension systems protect the entire population seems to depend on governments’ financial capacities and policies to improve the quality of employment instead of on the models they may propose. 

 

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