How Much Do Latin American Pension Programs Promise to Pay Back?

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S P D I S C U S S I O N PA P E R

NO. 0927

Summary Findings We present a new database of social security indicators for eleven Latin American countries designed to assess pension schemes in terms of the payments they promise in return to contributions. Based on this data, we analyze inequality, insurance and incentives to work, using the replacement rates and the internal rates of return implicit in the flows of contributions and pensions. Our results indicate that most programs analyzed are progressive in the sense that, other things equal, they yield higher returns to low than to high income workers. Poor workers, notwithstanding, often have flat age-earnings profiles and lower life expectancy, both of which reduce the rates of return received from social security. The Argentinean and (the pre-2008) Uruguayan programs severely punish short contribution careers, providing strong incentives for workers in the programs to continue contributing until they reach minimums that vary between 30 and 35 years of contributions. The counterpart is that these programs do not hedge workers against the risk of having short working careers; quite the opposite, they raise the uncertainty workers face. The very low rates of return that the Argentinean and Uruguayan main pension programs pay to workers with short working careers are likely to impact strongly on low income workers, as the probability they experience interruptions is higher. The Brazilian, Chilean and Mexican programs show a better balance between insurance against the risk of short working careers and incentives to work. The defined benefit programs of Argentina, Ecuador and Uruguay strongly discourage early retirement; the Chilean and Mexican programs are more neutral. Argentina, Chile and Uruguay passed reforms to their main pension programs in 2008. Unlike the Argentinean reform, the Chilean and Uruguayan 2008 reforms strengthened the social protection that programs provide, shifting the balance towards more insurance and less incentives to work. HUMAN DEVELOPMENT NETWORK

About this series...

Social Protection Discussion Papers are published to communicate the results of The World Bank’s work to the development community with the least possible delay. The typescript manuscript of this paper therefore has not been prepared in accordance with the procedures appropriate to formally edited texts. The findings, interpretations, and conclusions expressed herein are those of the author(s), and do not necessarily reflect the views of the International Bank for Reconstruction and Development / The World Bank and its affiliated organizations, or those of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. For free copies of this paper, please contact the Social Protection Advisory Service, The World Bank, 1818 H Street, N.W., Room G7-703, Washington, D.C. 20433 USA. Telephone: (202) 458-5267, Fax: (202) 614-0471, E-mail: socialprotection@worldbank.org or visit the Social Protection website at www. worldbank.org/sp.

How Much Do Latin American Pension Programs Promise to Pay Back?

Alvaro Forteza and GuzmĂĄn Ourens

December 2009


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