private and social pensions in Latin America

FIAP (FederaciĆ³n Internacional de Administradoras de Fondos de Pensiones/International Federation of Pension Funds Administrators), the Latin American trade group of private administrators of government-mandated contributory pensions, now acknowledges the need for social pensions, financed from general government revenue. Private managers of Latin American pension funds in the past tended to ignore social pensions, at least in part because these provide little or no opportunity for private profit.

A recent 9-page FIAP report begins by explaining the need for social pensions:

More than half of the population of the region, on average, is not covered by the contributory systems. Hence, non-contributory pensions provide a solution to this problem by offering protection against poverty to this segment of the population. ….

Non-contributory pensions (also called social pensions), as their name implies, are those that do not require prior social security contributions. These pensions are usually financed by general State revenues. Non-contributory pensions can be universal, i.e., granted to the entire population, or means-tested. The latter are assigned subject to an assessment of the income [and/or assets] of the individual or family. ….

[B]etween 2002 and 2015 the proportion of Latin Americans over the age of 65 with access to some kind of pension rose from 53.6% to 70.8%, and this increase was due primarily to the expansion of the non-contributory pension systems. In fact, between 1990 and 2016, the number of countries with non-contributory pension systems in Latin America and the Caribbean went from 8 to 26. ….

The report then discusses (very poorly) the design of social pensions:

It is not yet clear what an optional design should be. The big challenge is for non-contributory pensions not to discourage the pension culture in society …. Overly-generous benefits of the non-contributory programs entail the risk of workers choosing not to contribute to the formal system, because they have a guaranteed pension when they reach retirement age. Hence, the general recommendations of the World Bank are that non-contributory pensions should focus on the poorest ….

FIAP, “Non-contributory pension programs in Latin America“, Pension Notes 24, April 2018.

Well, the World Bank and FIAP may have no idea what the optimal design of a social pension might be, but I do. The optimal pension is a basic benefit given to all older persons, without a means-test. If the benefit is set at the poverty level, poverty among older persons will be eliminated. The pension should be added to other income for tax purposes, and tax rates can be increased to ensure that additional taxes paid by the very wealthy at least offset the universal pension they receive.

A universal age pension provides income security to everyone in old age, without stigma, and is especially beneficial for unpaid workers and caregivers. Since the benefit is based on age rather than retirement, there is no penalty for continuing to participate in the labour force and earn income. New Zealand, Mauritius and Bolivia are examples of countries with a long history administering this type of social pension.

 

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