“COMPARED CONTRIBUTION COLLECTION MODELS” Superintendencia de AFJP, Julio de 2007 “COMPARED CONTRIBUTION COLLECTION MODELS” HUGO BERTIN Strategic Studies and Statistics Manager, AFJP Superintendency, Argentina “The future of pensions: development of the individually funded programs” FIAP, Lima, May 28 and 29, 2008 Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

AGENDA Social security collection process Collection systems Design of the collection system: factors to consider Advantages and risks of centralization and decentralization Contribution collection in Latin America Conclusions

SOCIAL SECURITY COLLECTION PROCESS Superintendencia de AFJP, Julio de 2007 SOCIAL SECURITY COLLECTION PROCESS The collection process phases include: Reception of the workers’ contributions paid in by employers and self-employed workers to the bank accounts made available by the collection agencies; includes financial and information transfers. Authentication and control of the collection in the bank accounts of the collection agencies. Money and information transfers to the bank accounts of the pension fund managers. The collection is integrated into the individual account management processes, the management of the investment portfolios, the processing and payment of the pension benefits and customer service to members. Social security collection is a process in which multiple geographically dispersed actors participate: employers, self-employed workers, banks, collection agencies, pension fund managers, supervision agencies. Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

SOCIAL SECURITY CONTRIBUTION AND COLLECTION SYSTEMS Superintendencia de AFJP, Julio de 2007 SOCIAL SECURITY CONTRIBUTION AND COLLECTION SYSTEMS Integrated contributions: social security, work hazards, unemployment insurance, health , taxes. Separate contributions. Centralized collection: one public or private agency is responsible for the collection and distribution of the contributions to the pension fund managers. Decentralized collection: each fund manager collects directly or through agreements with collection agencies i.e. banks – members’ contributions. Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

INTEGRATED vs. SEPARATE CONTRIBUTION SYSTEMS Superintendencia de AFJP, Julio de 2007 INTEGRATED vs. SEPARATE CONTRIBUTION SYSTEMS Government agency: contribution integration facilitates collection management, individual checks, cross checks and the supervision process in general. Employers: contribution integration makes management easier and reduces administrative costs for the company. However, it can lead to avoidance or evasion since it increases the cost of “the decision to pay.” To the degree that the payment of taxes and social security contributions is a requirement for accessing other services, e.g. bank loans – the aforementioned risk will be reduced. Self-employed workers: the different perceptions of the benefits and costs of contributions to health, old age, disability, death and housing systems for different types of workers – e.g. women, men, single or married people with or without children – could induce them to pay a higher rate in some cases and a lesser rate (or nil) in others; nonetheless, as mandatory systems usually have fixed percentage contributions, the design of integrated contributions within a certain range – e.g. social security and health, would be preferable for the system as a whole. Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional 5

DESIGN OF THE COLLECTION SYSTEM: FACTORS TO CONSIDER Superintendencia de AFJP, Julio de 2007 DESIGN OF THE COLLECTION SYSTEM: FACTORS TO CONSIDER PAYGO and individually funded systems Periodical mandatory (through the employer) or voluntary (directly by the member) social security contributions Integrated contributions (social security, work hazards, health, unemployment insurance, taxes) vs. Individual contributions: economies of scope Economies of scale Standards and technological portability Better safety practices Fees, costs and incentives Entry barriers Mandatory contributions control and checking mechanisms Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

CENTRALIZED SYSTEMS Advantages: Economies of scale Economies of scope Superintendencia de AFJP, Julio de 2007 CENTRALIZED SYSTEMS Advantages: Economies of scale Economies of scope Supervision: the ability to oversee and cross-check with other taxes Government incentives Risks: “Transfer cost” Relative importance of social security within national taxes (“prior vices”) Standards and technological portability (obsolescence); better safety practices. Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional 7

DECENTRALIZED SYSTEMS Superintendencia de AFJP, Julio de 2007 DECENTRALIZED SYSTEMS Advantages: Greater competition (no economies of scale) Greater transfer speed Risks: Entry barriers Standards and technological portability (obsolescence); better safety practices. Coordination with the government supervision agency Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional 8

COLLECTION SYSTEMS IN LATIN AMERICA Superintendencia de AFJP, Julio de 2007 COLLECTION SYSTEMS IN LATIN AMERICA Members % of the collection % operational costs Billions of US$ millions Argentina AFIP, Federal Public Taxes Administration 0.70 4.3 30.1 10.8 Bolivia AFP directly 2.9 1.1 Chile AFP directly or through PREVIRED 111.0 8.0 Colombia Information operators - PILA System 24.6 7.8 Costa Rica Costa Rican Social Security Fund SICERE 1.17 16.0 1.4 1.6 El Salvador AFP directly or through agreements with banks 3.9 Mexico IMSS, Mexican Social Security Institute 75.9 38.5 Peru 20.1 4.0 Dominican Republic TSS, Social Security Treasury EPBC 0.9 Uruguay BPS, Banco de Previsión Social 3.4 0.8 Source: Bertin-Calvo (Comp.): Individual funding in the Latin American Pension Systems. 2007. ww.aiosfp.org AIOS: Statistical Bulletin; December 2007. www.aiosfp.org Pension funds Countries Centralized Decentralized Collection costs Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

Superintendencia de AFJP, Julio de 2007 CONCLUSIONS Decentralization is a more flexible system with greater competition and is adaptable to markets with multiple service providers. Centralization enables taking advantage of the benefits derived from economies of scale and scope. The alternatives are: public or private management. In the first case, the collection-checking process is integrated. The challenges are: technological innovation (risk of obsolescence), ranking of the social security collection process within overall tax collection and for the fee to reflect the service costs without becoming a “transfer price.” Direct private management, or through the concession of the public service, has similar challenges in terms of technological innovation (risk of obsolescence). For achieving efficiency, it should be integrated to the supervision process and the fee should reflect the costs and not become an entry barrier to new actors. Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional

Thank you for your attention Superintendencia de AFJP, Julio de 2007 Thank you for your attention hbertin@safjp.gov.ar (54 11) 4320 5720 www.safjp.gov.ar Gerencia de Estudios Estratégicos y Estadísticas - Dep. de Estadísticas y Análisis Previsional