WASHINGTON, December 13, 2004— Latin America's more than decade-long experience with pension reform has delivered significant fiscal, social and financial benefits, but the failure to extend access to formal financial protection for old age to a broader segment of society has been a major disappointment, according to a new World Bank study.
The final version of Keeping the Promise of Social Security in Latin America – now available from the World Bank and Stanford University Press - finds that Latin American governments that have undertaken structural overhauls to their national pension systems have improved their budget position, made public pensions more equitable, and encouraged savings and investment.
"Social security reform in Latin America has fundamentally remade systems that were bloated and inequitable," said Guillermo Perry, World Bank Chief Economist for Latin America and the Caribbean. "But the failure to extend coverage to a broader segment of society makes it premature to call the reforms a success. Old age poverty remains a significant risk for the region's citizens."
The study assesses the region's experience with structural reforms to social security. Purely defined benefit, pay-as-you-go (PAYG) public pension systems –in which the pensions paid to the elderly are financed by taxes paid by current workers-- have been substantially downsized, and mandatory individual savings accounts and voluntary pension plans have been added in a process known as the "multi-pillar approach" to pension reform. Beginning with Chile in 1981, 12 Latin American countries have adopted this approach.
The publication, co-authored by Indermit Gill, Truman Packard and Juan Yermo, finds that pension reforms in the region can count many successes. Fiscal sustainability has been improved by reducing the overly generous benefits paid under the old systems. Although transition costs have been higher than expected in some cases, reforms have generally had a positive effect on government finances.
In addition, the study says that reforms have encouraged capital market development by channeling savings into investments in privately managed pension funds --the size of pension fund assets as a share of GDP in the region has almost doubled in just five years. Improvements in equity have also resulted from the reforms, as governments have reduced the generous benefits that required regressive transfers from poorer to richer workers under the old systems. And benefit levels are now more closely linked to contributions, providing incentives for workers to participate in the systems. Nevertheless, persistently low coverage remains an obstacle to further improving equity and reducing old age poverty, according to the study.
The authors argue that, although structural reforms were a step in the right direction, more attention should now be paid to ensuring privately administered pension plans are efficient, and offering affiliated workers and their families the best possible coverage at competitive prices. According to the publication, governments should be paying much more attention to the poverty-prevention function of national pension systems.
The authors note that because many Latin American countries have only recently undertaken reforms, the book should be considered a preliminary assessment, rather than a definitive evaluation on pension reforms.