The solidarity pillar Future challenges in the pensions reform in Chile and the Latin American perspective André Medici (SDS-SOC)

Summary The Chilean pensions reform –New coverage and benefits –New roles of the participants –The three pillars –The Solidarity Pillar –Who will beneficiate from it? –Incentives to self-employed and informal workers Chile in the Latin American context –Forecasting fiscal deficits –Covering the poor –Other countries challenges –Conclusions and questions

New coverage and benefits Universal rights to social security; Reducing the risks of the elder to fall in poverty; Pensions as a fair retribution to the financial contribution or personal effort to the society by any kind of paid or unpaid work.

New roles of the participants Increasing finantial contributions during the working age according the economic capability of each one; Increasing social responsability of the managers of the social security system – employers and state – in order to achieve the acomplishment of the enrolled rights, the efficiency and the sustainability of the system.

The three pillars Creating an integrated solidarity pillar; Strengthening the compulsory contributory pillar by the incorporation of autonomous and informal workers; Developing a voluntary contributory pillar by incentives to contributions over the limit by the highest income level workers (Brazil´s case). Assuring consistance and integration among the three pillars.

The solidarity pillar Offering old-age, disability and survivorship benefits, coordinated with the benefits of the contributory pillar, with solidarity funding out of government resources, replacing the current welfare pension and guaranteed minimum pension programs. Substituting the current assistancial pension ($44 K) and minimal guaranteed pension ($87 K based on 240 months of contribution); Estructured by a Universal Basic Pension (UBP- $75K mil) for people who obtain no self-funded pension at all from the contributory system. This benefit would also be available to people with some level of fund accumulation, and would be added in a decreasing proportion to the pension that they are able to self-fund out of their savings, being completely absorbed as from a self-funded pension of $200K.

Who are those beneficiated from it? Workers with sporadic income, such as seasonal workers and the self-employed. Women will be better covered given that strong gender equity measures will be in place; According to this design, the worker will always be able to augment his final pension by making a greater effort to save, while the state’s contribution will be gradually increased for workers with less ability to save. Over half of those people over 65 years of age. Only people belonging to the richest 40% of households would be excluded from the solidarity pillar. The “years of contribution” requirement would be eliminated for purposes of determining its benefits and replaced with the value of the pension self-funded by the worker’s savings.

Incentives to self-employed and informal workers independent workers will be fully entitled to the same pensions offered to employees, including the benefits of family allowances and the law of industrial accidents. They will be able also to join compensation funds, Systems will be developed to make it easier for self- employed and informal workers to contribute, adapting the current collection mechanisms to their work and organizational situation. A transition period of about 5 years is proposed to bring mandatory contribution into full effect it is proposed that the tax treatment of savings originating in exempt income will be adapted and a new system of collective voluntary pension saving will be created, with contributions agreed between workers and their employer

Chile in the Latin American context

PaísesDéficit asociado a las reformas de pensiones y proyecciones futuras Año inicial Argentinan.d.2,52,33,6 Bolivia0,23,5 f 2,11,7 Colombia0,91,61,03,4 Chile3,87,23,40,5 México0,90,50,7 Uruguay5,14,02,12,5 Projected Fiscal deficit as a share of GDP Will the current reform revert the Chilean expected decrease in the fiscal deficit?

Covering the poor Pensions are essential for the poor elderly income; In the last ten years the number of 65 and older without pensions coverage is increasing Fiscal costs of cash transfer programs could explode in the future if sustainable old age pension schemes are not timely structured. Pensions as a share of revenue for the population aged 65 and over by income quintiles (around 2000)

País% de personas de 60 años y más como que reciben pensiones Valor promedio de las pensiones como múltiple de la línea de pobreza UrbanoRuralUrbanoRural Argentina Bolivia Brazil Chile Colombia Costa Rica Ecuador El Salvador Honduras821.2 Mexico Nicaragua Panama Paraguay Dominican Republic Uruguay Promedio Share of the population 60 years and older receiving pensions (circa 2000)

Pensions as a share of revenue of population 65 years and older by income quintile ( circa 2000) Country1 st Quintile2 nd Quintile3 rd Quintile4 th Quintile5 th QuintileTotal Argentina(*)86,193,588,9 67,776,9 Bolivia12,825,624,826,932,625,6 Brazil88,778,183,074,661,566,8 Chile70,479,572,478,551,058,3 Colombia54,160,756,665,467,365,3 Costa Rica54,373,366,868,344,152,3 Dominican Republic18,314,611,115,112,012,8 Ecuador38,954,249,162,562,754,0 El Salvador59,054,157,851,438,844,7 Nicaragua9,04,53,45,51,95,3 Panama58,270,671,273,964,567,3 Paraguay23,226,629,034,821,824,1 Peru8,414,116,713,217,015,1 Uruguay86,386,084,779,765,473,4

Other countries` challenges Argentina: Since 2001 government sectors and society have a inconcluded debate about the creation of a Universal Benefit (BU). Why? Fiscal constraints? Between 2002 and 2008 the population 65 and older without pension coverage is expected to increase from 1,4 to 2,0 millions. Brasil has created in the 70´s a good coverage to old age by non contributory schemes, but the pension fiscal deficit is associated with that.

Conclusions Chilean proposed pension reform –Good design –Fairness, equity and good incentives Challenges –Is it fiscally acceptable by the government? –Will the incentives work? –Will it increase labor costs affecting the Chilean export drive model? –How much will the administrative costs ammount to and which kind of internal competition scheme will be related with the new system?