Guiding Otto in Macondo - Contributory pensions schemes in Latin America. ThanksOtto Conference, Berlin

1. Better Pensions, Better Jobs
Guiding Otto in Macondo
Angel Melguizo, OECD Development Centre Thanks, Otto! 125 years of pensions and new global perspectives HelpAge - Berlin, October 29, 2014 Based on Bosch, M., A. Melguizo and C. Pages (2013), Better Pensions, Better Jobs. Towards universal coverage in Latin America and the Caribbean. IDB

2. Hernando Nossa

3. Low pension coverage in LAC: 4 out of 10 among pop. 65+ do not get a pension
(National Household Surveys data)

4. The labor market at the epicenter of the challenge and the solution
Only 44,7 % of workers in LAC contribute to a pension system
(National Household Surveys data)

5. Pension savings are low for non-wage earners, workers in small firms, or low-income workers …

6. … but also for the emerging middle class

7. A conceptual framework to understand informality
Long-term savings difficulties
Design and operational flaws
Parallel social protection schemes
Low pension savings in LAC = High labor informality

8. High costs of formality (taxes and labor regulation)
could be playing a role…
Cost of formality in selected economies in LAC
(Percentage of wages)
Source: Pagés (2010)
Taxes and contributions Holidays Other benefits Firing costs

9. … especially when interacting with labor regulations
Source: Bosch, Melguizo and Pagés (2013)
Share of workers contributing to pension schemes by income decile in Colombia, Honduras and Venezuela

10. Source: Bosch, Melguizo and Pagés (2013)
Procrastination and overconfidence traps
Unrealistic belief in retirement savings adequacy with less
than 10 years of contributions
Have you thought about financing your retirement?

11. Informality is not an incurable disease
It is the outcome of:
 Design: Systems exclude (de jure or de facto) non- wage earners.
 Incentives: Provided by the state in labor markets (including monitoring).
 Value: Placed by workers and firms on social security.
All this can be changed with pro-active policies.

12. Eradicating poverty in old age and increasing formal employment
Better Pensions
Better Jobs
Social/universal pension
•Anti-poverty
•Sustainable
•Efficient
Formal jobs subsidies
•Subsidizing SS contributions
•Innovating in channels
•Enforcement, information and financial literacy

13. Better Jobs: Subsidizing formal employment
Formality could increase from 45% to 63% (10 p.p. higher than the statu quo scenario)
45%
63%
Source: Bosch, Melguizo and Pagés (2013)
(State subsidy for all workers/firms equivalent to 50% of total social security contribution of one minimum wage)

14. Better Pensions and Better Jobs
Average annual cost for LAC = 1.5% of GDP

15. 15
Tax revenue over GDP
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
0
5
10
15
20
25
30
35
40
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Difference (A-B)
LAC (A)
OECD(34) (B)
Increase in tax revenue since 1990…

16. 16
Tax revenues
(%GDP, 2012)
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
Tax structure
(%GDP, 2012)
0 10 20 30 40
OECD (34)
LAC (18)
Guatemala
Dominican Republic
Venezuela
El Salvador
Honduras
Paraguay
Peru
Panama
Nicaragua
Colombia
Mexico
Ecuador
Chile
Costa Rica
Bolivia
Uruguay
Brazil
Argentina
25.4
16.9
33.8
17.7
6.2
Impuestos sobre la renta y las utilidades Contribuciones a la seguridad social
Impuestos generales sobre el consumo Impuestos específicos sobre el consumo
Otros impuestos
33.5
26.2
20.3
10.7
9.3
AL (18) OCDE (34)
… with differences in composition and by countries

17. Financing choice depends on current and future
tax revenues
Consumption taxes and pension and health contributions in Latin
America and the Caribbean, 2012 (Percentage of GDP)

18. 18
Source: OECD-ECLAC-CIAT (2014), Revenue Statistics in Latin America 1990-2012
0
20
40
60
80
100
Bolivia (E.P.)
Peru
Chile
Ecuador
Argentina
Colombia
Venezuela (R.B.)
Brasil
México
7.7
12.2
3.3
3.1
14.7
2.8
4.4
9.8
2.2
%GDP
PEMEX
Fiscal revenues from non-renewable resources
(billion USD and %GDP)
Alternative resources, based on equity considerations

19. Now it’s the time: financial and political economy challenges can be overcome
 Demography: The region is still young but the window of opportunity will rapidly close.
 Financing: Pension reform requires an increase in resources allocated to these policies, preferably from alternative sources (VAT, commodities).
 Improvement in formal employment and productivity: Pension reform is crucial to achieve both.
 Political economy: Formal employment is a central aspiration of the middle classes.

20. Guiding Otto www.universalcoverage.net www.latameconomy.org