Keeping the Promise of Social Security in Latin America (Latin American Development Forum)

Contents......Page 11
Foreword......Page 19
Acknowledgments......Page 21
1 RETHINKING SOCIAL SECURITY PRIORITIES IN LATIN AMERICA......Page 25
PART I. RETROSPECTIVE: FISCAL, FINANCIAL, AND SOCIAL BENEFITS FROM PENSION REFORM......Page 41
2 STRUCTURAL REFORMS TO SOCIAL SECURITY IN LATIN AMERICA......Page 43
3 THE FISCAL SUSTAINABILITY OF PUBLIC PENSION PROMISES IN LATIN AMERICA......Page 63
4 THE FINANCIAL BENEFITS OF PENSION REFORM......Page 81
5 SOCIAL GAINS FROM PENSION REFORMS IN LATIN AMERICA......Page 113
PART II. ANALYTICAL: HOW GOVERNMENTS CAN HELP INDIVIDUALS DEAL WITH RETIREMENT......Page 131
6 HOW INDIVIDUALS VIEW SOCIAL SECURITY......Page 133
7 HOW WELL HAS THE “SAVINGS” COMPONENT PERFORMED FROM THE INDIVIDUAL’S PERSPECTIVE?......Page 149
8 THE PREFERENCES THAT INDIVIDUALS REVEAL......Page 189
PART III. PROSPECTIVE: THE FUTURE OF SOCIAL SECURITY IN LATIN AMERICA......Page 221
9 PREVENTING POVERTY IN OLD AGE: IMPROVING THE POOLING COMPONENT......Page 223
10 FACILITATING CONSUMPTION SMOOTHING: IMPROVING THE SAVINGS COMPONENT......Page 251
11 THE WAY FORWARD......Page 291
TA.1 Assumptions Common to All Country Cases......Page 307
Appendix. Background Papers for Keeping the Promise......Page 315
Bibliography......Page 317
Index......Page 345
1.1 Three Central Dilemmas of Pension Privatization......Page 27
3B.1 Cash Flow Gap in Bolivia......Page 69
3B.2a Chile Was Fiscally Strong prior to Reform; Argentina Was Not......Page 71
4.1 The Importance of Concomitant Reforms in the Financial System......Page 88
4.2 Inflation-Indexed Securities in Latin America......Page 98
5.1 Defining the Coverage Problem: What Is It and Why Do We Care?......Page 119
5.2 Was Increasing Coverage an Objective of Pension Reform?......Page 121
6.1 The Welfare State as a Piggy Bank to Reduce Old-Age Income Insecurity......Page 134
6.2 A Theory of “Comprehensive Insurance”......Page 137
7.1 The Four Fundamental Risks in Retirement Income Security Systems......Page 151
7.2 Comparing Notional Defined Contribution Systems and Pension Funds Invested in Inflation- and Wage-Indexed Government Bond......Page 152
7.3 Argentina’s System in Crisis: Do Private Accounts Protect Workers from Policy Risk?......Page 157
7.4 Points to Keep in Mind When Comparing Risks in Pension Fund Portfolios in Latin America......Page 161
8.1 PRIESO: Social Risk Management Surveys in Chile and Peru......Page 200
8.2 Peru’s Reformed Pension System: Multipillar in Name Only......Page 203
9.1 The Cuota Social: Preventing Poverty among Elderly Men and Women in Mexico......Page 232
9.2 BONOSOL: Bolivia’s Universal Pension Program......Page 234
10.1 The Big-Bang Approach to Voluntary Pension Savings Reform in Chile......Page 272
10.2 The Role of the Financial System in Brazil’s Voluntary Pension Savings Plans......Page 274
11.1 The Role of the Second Pillar......Page 302
1.1 Pension Systems Cover between 10 and 60 Percent of the Economically Active Population in Latin American Countries......Page 30
1.2 Between One-Tenth and Two-Thirds of the Aged Populations Receive Pensions in Latin American Countries......Page 31
2.1 Rising Life Expectancy Increases the Share of Elderly People in the Population and Upsets the Balance of Pure PAYG Pension Systems......Page 44
2.2 Destination of Mandatory Pension Contributions......Page 53
3.1 Simulated Implicit Pension Debts (IPDs) with and without Structural Reforms......Page 64
3.2 Total Pension Debt (Explicit) Accumulated after 2001, with and without Structural Reforms......Page 67
3B.2b Pension System Deficits Contributed Significantly to Deteriorating Fiscal Balance in Argentina......Page 72
3.3 There Is No Indication That Pension Reform Increased Mexico ’s Country Risk......Page 76
4.1 Pension Funds Are Major Investors in Government Debt......Page 87
4.2 Interest Rate Spreads Have Declined in Peru and Bolivia Since the Reforms (1993–2002)......Page 103
4.3 Stock Market Turnover Ratios in Selected Latin American Countries (1990–2001)......Page 105
5.1 Structural Reforms Are Likely to Improve Equity by Lowering Regressive Transfers and Returns......Page 115
5.2 Structural Reforms Make the New Systems More Gender Neutral, but Women’s Average Benefits Can Be Significantly Lowered by......Page 116
5.3 Pension Income Increases Inequity Relative to Earned Income from Labor......Page 118
5.4 Has Participation Increased? There Is No Clear Pattern in Data on Contribution to National Pension Systems......Page 124
7.1 Pension Funds Invest Mainly in Government Bonds and Instruments Issued by Financial Institutions......Page 156
7.2 The Standard Trade-Off between Risk and Return Has Not Materialized in Latin America (Returns from Inception to December 2000)......Page 160
7.3 In Chile Intercohort Differences in Returns Have Been Large......Page 163
7.4 Returns on Deposits in Chile Have Been Lower but More Stable Than Pension Fund Returns......Page 164
7.5 Brady Bonds Would Have Been a Better Investment Than Domestic Equities for Peruvian Pension Funds......Page 165
7.6 Variable Commission Rates Have Risen as a Result of Declines in Contribution Rates in Argentina and Peru......Page 171
7.7 Half of the Pension Contributions of the Average Chilean Worker Who Retired in 2000 Went to Fees......Page 172
7.8 Participation in the Second Pillar Is Costlier for Poorer Workers in Chile......Page 173
7.9 Annuities Have Yielded Varying Levels of Retirement Benefits in Chile......Page 178
7.10 Chile’s Pension Funds Did Not Do a Good Job of Educating Participants: Fondo 2 Had Few Takers Despite Earning Higher Ret......Page 180
7.11 Chilean Workers’ Choices in the New Multifund System Largely Correspond with the Default Options......Page 182
7.12 Choices Are Similar for Different Income Groups in Chile If Controlling for Age......Page 183
8.1 Chile: Reported Contribution Density......Page 204
8.2 There Is No Difference in Risk Preferences between Employees and Self-Employed Workers Who Responded to the PRIESO Survey in Chile......Page 206
8.3 Self-Employed Workers Who Contribute to the AFP System in Chile Have a Greater Tolerance for Risk......Page 207
8.4 Peru: Reported Contribution Density......Page 208
8.5 There Is No Difference in Risk Preferences between Employees and Self-Employed Workers in Peru......Page 211
8.6 Self-Employed People in the AFP System in Peru Are More Risk Averse......Page 212
9.1 Rising Life Expectancy Increases the Share of Elderly People in the Population and Upsets the Balance of Pure Pooling Pension Systems......Page 224
9.2 Accumulated Wealth Increases with Age and Is Greatest among Old People......Page 228
9.3 Relative Generosity and Cost of Alternative Public Poverty Pension Arrangements in Selected Countries......Page 236
9.4 Average Noncontributory Pensions Are between 30 Percent and 60 Percent of Average Contributory Pensions......Page 241
10.1 In Peru, Fees Remain Persistently High, Despite Increasing Returns and Declining Administrative Costs......Page 258
10.2 Savings Products Offered by Insurers Are More Popular Than the AFPs’ Liquid Cuenta 2......Page 273
10.3 Mutual Funds Have Grown Significantly Only in Brazil, Where Pension Funds Are Voluntary......Page 276
10.4 Fees for Equity Mutual Funds in Chile Have Remained Stubbornly High......Page 279
10.5 Economies of Scale in Fund Management Kick in at Low Asset Levels......Page 280
10.6 Insurance Company Bankruptcy Is a Threat to Policyholders......Page 282
11.1 Coverage Can Vary at Similar Stages of Economic Development......Page 298
1.1 Instruments of Old-Age Income Security......Page 34
2.1 Principal Features of Structural Reforms to Social Security Systems (Old-Age Disability and Death) in Latin America during the 1980s and 1990s......Page 47
2.2 Principal Features of Structural Reforms to Social Security Systems (Old-Age Disability and Death) in Latin America during the 1990s and 2000s......Page 50
2.3 Contribution Rates and Earnings Ceilings in the Mandatory Funded Systems......Page 56
2.4 Voluntary Funded Pillars in Latin America......Page 59
3.1 Current Pension Deficits (Benefit Expenditures Less Contribution Revenue) Financed by Government Transfers......Page 66
4.1 Portfolio Ceilings by Main Asset Classes (December 2002)......Page 85
4.3 Assets Held by Pension Funds Have Doubled as a Percentage of GDP (December 1998–December 2002)......Page 86
4.4 Pension Funds Invest Mainly in Debt of Governments and Financial Institutions (December 2002)......Page 91
4.5 For the Average Latin American Country, the Two Largest Institutions Control Two-Thirds of the Pension Funds (December 20......Page 92
5.1 There Is Evidence That Pension Reforms Positively Affect Incentives......Page 126
5.2 Participation Rates and Incidence of Benefits Show a Regressive Pattern of Coverage by Formal Pension Systems......Page 128
6.1 Justifying a Government-Imposed Mandate to Save for Old Age—Microeconomic Reasons......Page 141
6.2 Justifying a Government-Imposed Mandate to Save for Old-Age—Macroeconomic Reasons......Page 144
7.1 Gross, Real Returns to Pension Funds Have Been High......Page 154
7.2 Asset Allocation and Portfolio Limits......Page 166
7.3 Workers Still Pay High Commissions in Some Countries (December 2002)......Page 169
7.4 The Form of Benefits Is Usually Inconsistent with an Assumption of Retiree Irrationality with Respect to Saving......Page 175
7.5 The Five New Funds in Chile Vary by Proportion of Equity Investment......Page 181
8.1 Probability That Workers Contribute to Social Security Is Determined by Individual, Household, and Labor Market Factors......Page 195
8.2 Reformed Pension Systems in Chile and Peru Are Similar, but There Are Important Differences......Page 202
9.1 Poverty among Elderly People Is as Frequent as among Other Age Groups When Measured by Current Income......Page 226
9.2 Expenditure on Noncontributory Pension Programs......Page 239
9.3 Noncontributory, Poverty Prevention Pensions Cover a Significant Portion of Pension Recipients......Page 240
9.4 As a Share of Average Wages, Minimum Wages Are Relatively High in Chile, Colombia, and Some Other Latin American Countrie......Page 242
9.5 Cost of Providing and Guaranteeing a Public Pension Equal to the Minimum Wage......Page 244
10.1 Reform Options to Reduce the Operational Expenses of the New Private Second Pillar......Page 259
10.2 Reform Options to Ensure That Savings Are Passed on to Affiliates as Lower Commissions......Page 264
10.3 Reform Options to Improve Investment and Longevity Risk Management......Page 267
TA.2 Country-Specific Details, Assumptions, and Sources of Data......Page 308
TA.3 Assumed Profiles of Representative Affiliated Men and Women......Page 313