Reforming Pension Systems in Latin America and the Caribbean: some thoughts Angel Melguizo Inter-American Development Bank Prepared for the XXXVIII Meeting of the Network of Central Banks and Finance Ministries Washington DC - April 17-18, 2013

Main Messages  Pension Savings are Low and Unequal  Pension-related Fiscal Challenges are High and Diverse  Principles and Contents of a Reform Roadmap  Pension Savings and Infrastructures

Pension Savings are Low and Unequal  There are many Americas Latinas… but overall, pension savings levels are low and concentrated among the dependent high-income workers, irrespectively of the pension scheme Workers contributing to pension schemes by income decile (% total population years, LAC-18 sample, circa 2010) Source: IDB, based on nation household surveys

Pension Savings are Low and Unequal  Middle-class workers (i.e. workers in the middle of the income distribution) are informal in some dimensions: no labour contract, no affiliation/contribution Distribution of non-agricultural middle-income workers by occupation (% total workers years) Source: Da Costa et al. (2011) and Carranza et al. (2012)

Pension-related Fiscal Challenges are High and Diverse  Low pension contributions are a leading indicator of short-term fiscal liabilities, illustrated by the slippery slope of non- contributory pension Source: HelpAge and IDC, circa 2012 Fiscal cost of non-contributory pensions (Percentage points of GDP, circa 2012)

Pension-related Fiscal Challenges are High and Diverse  Structural pension reform (from DB to DC) can help, but are not the panacea: transition costs tend to be heterogeneous (nature and timing), high and persistent Source: Melguizo et al. (2009) Transition deficit of the Chilean civil pension system (Percentage points of GDP)

Principles and Contents of a Reform Roadmap Principles  Global: old-age pensions, and disability and survivors, health, unemployment  Integral: coordination of pillars  Simple  Transparent: poverty vs. insurance  Efficient: savings, formal labour participation  Adapted to institutions: implementation  Fiscally sustainable

Principles and Contents of a Reform Roadmap Tools  Implementing an universal pension: anti-poverty citizen’s pension, anchored on strict rules (coverage, indexation)  Unlinking pension savings from the labour market: progressive and subsidised social contribution cuts (exemption for lower- income workers) plus  Regulating voluntary pension schemes: based on matching- contributions  Supervising and educating  Innovating: financial incentives and behavioural channels

Pension Savings and Infrastructures  Structural reforms (well functioning fully-funded DC) and parametric reforms (DB with reserve funds) could contribute to close the infrastructure gap.. not yet there Source: Dos Santos, Tuesta and Torres (2011) Pension funds investment in infrastructures (Percentage points of GDP, 2011)

Pension Savings and Infrastructures Why this – so far- limited contribution? General  Lack of confidence in long-term investment  Infra-development of concession mechanisms  Lack of adequate financial instruments Pension regulation  Prohibitions, quantitative restrictions, and rules on liquidity, valuation and ratings.  Performance regulation Technical: Risks  Sovereign risk of the portfolio  Concentration (indirect investments)

Summing up  Pension Savings are Low and Unequal –Pension savings reflect (and impact) the functioning of the labor markets (more than their DB/DC nature) –The middle is missing: middle-class workers are informal  Pension-related Fiscal Challenges are High and Diverse –Short-term: the slippery slope of non-contributory –DB-to-DC reforms are not the panacea: transition design matters  Principles and Contents of a Reform Roadmap –Relying less on the labour market –Innovating in tools; anti-poverty and pro-insurance  Pension Savings and Infrastructures –A win-win association, yet to be materialised

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