Costa Rica: reform of pension reform

Costa Rica decades ago initiated a pay-as-you-go (PAYGO), traditional social security pension scheme that is currently funded from mandated contributions equal to 7.59 per cent of payrolls (35% from employees and 65% from employers). In 1995, voluntary retirement savings accounts were added to the PAYGO pillar.

In 2005, contributions to private accounts became mandatory for new entrants into the social security system. Participation in Social Security is theoretically compulsory, but evaded by informal workers. Employers of formal labour must contribute an amount equal to 3.25% of payrolls. Employees contribute a minimum of 1% of earnings plus up to 0.7% of the account balance (2014) for administrative fees. Voluntary contributions are permitted, but are very rare. Upon retirement, contributors can access their private accounts by one of two options: programmed withdrawals or an annuity (private pension).

Administrators of private accounts from the beginning charged high fees, and gave extremely low returns on savings. In response to complaints, regulators in 2011 began to force the industry to reduce administrative fees by setting maximum fees the six authorized fund management companies (OPCs) can charge.

Effective January 1, 2014, the ceiling on administrative fees that pension fund management companies (OPCs) may charge accountholders was lowered to 0.70 percent of the account balance. … [b]eginning in January 1, 2011 [regulators] changed the method of calculating the administrative fees, from a mixed percentage of the accountholder’s salary plus the fund’s performance to a percentage of the account balance.

The ceiling was set at 1.10 percent of the account balance for the 2011–2013 period, with a gradual decrease in the ceiling on fees every 3 years until reaching 0.35 percent in January 2020. …. (Prior to the change, OPCs were permitted to charge fees of up to 4 percent of salary and 8 percent of the fund’s performance.) [Note: Fees equal to 4% of salary amounts to a charge of nearly 100% of contributions. No wonder participants complained that fees were high! Or is this a typo?]

….  Total assets under management for the six OPCs was about $US5.5 billion at the end of November 2013; most of the assets are invested in government bonds.

An individual account is mandatory for new entrants to the labor force after 2005. Employees contribute 1 percent of salary and employers contribute 3.25 percent of payroll to the individual account. Employees may choose an OPC and transfer from one OPC to another at any time; those who do not choose an OPC are automatically enrolled in the Banco Popular OPC, part of the government-run bank— Banco Popular. The individual accounts supplement the first pillar pay-as-you-go public pension program. A full retirement benefit from either program is paid at age 65 with 25 years of contributions.

US Social Security Administration, “Costa Rica“, International Update, March 2014.

Tags: ,

Comments are closed.