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CONGRESS OF THE UNITED STATESCONGRESSIONAL BUDGET OFFICEAlleneMcclendon878
CONGRESS OF THE UNITED STATES
CONGRESSIONAL BUDGET OFFICE
CBO
Social Security
Policy Options
JULY 2010
Pub. No. 4140
A
S T U D Y
CBO
Social Security Policy Options
July 2010
The Congress of the United States O Congressional Budget Office
CBO
Notes
Unless otherwise noted, all years are calendar years.
Numbers in the text and tables may not add up to totals because of rounding.
Preface
Social Security is the federal government’s largest single program, and as the
U.S. population grows older in the coming decades, its cost is projected to increase more
rapidly than its revenues. As a result, under current law, resources dedicated to the program
will become insufficient to pay full benefits in 2039, the Congressional Budget Office (CBO)
projects. Long-run sustainability for the program could be attained through various
combinations of raising taxes and cutting benefits; such changes would also affect the
Social Security taxes paid and the benefits received by various groups of people. This CBO
study examines a variety of approaches to changing Social Security, updating an earlier work,
Menu of Social Security Options, which CBO published in May 2005. In keeping with CBO’s
mandate to provide objective, impartial analysis, the current study makes no
recommendations.
The study was written by Noah Meyerson, Charles Pineles-Mark, and Michael Simpson of
CBO’s Health and Human Resources Division, under the direction of Joyce Manchester and
Bruce Vavrichek. Research assistance was provided by Philip Armour, Sarah Axeen, and
L. Daniel Muldoon. James Baumgardner, Sheila Dacey, Benjamin Page, David Rafferty,
Jonathan Schwabish, and Julie Topoleski provided helpful comments on earlier drafts.
Andrew Biggs of the American Enterprise Institute and Paul Van de Water of the Center for
Budget and Policy Priorities also provided useful comments. (The assistance of external
reviewers implies no responsibility for the final product, which rests solely with CBO.)
Kate Kelly edited the manuscript, and Leah Mazade and Sherry Snyder proofread it.
Maureen Costantino took the cover photograph and designed the cover, and Jeanine Rees
prepared the study for publication. Jonathan Schwabish provided help with graphics.
Monte Ruffin produced the initial printed copies, Linda Schimmel coordinated the print
distribution, and Simone Thomas prepared the electronic version for CBO’s Web site
(www.cbo.gov).
Douglas W. Elmendorf
Director
July 2010
CBO
www.cbo.gov
http://www.cbo.gov/doc.cfm?index=6377
MaureenC
Doug Elmendorf
Contents
Summary ix
Introduction 1
An Overview of Social Security 1
Social Security Projections 4
Assessing Options for Changing Social Security 7
Key Elements of Social Security 8
Scope of the Options 9
Effects of the Options on the System’s Finances 11
Effects of the Options on Payroll Taxes Paid and Benefits Received by
Various Groups 13
Effects of the Options on Work and Saving 15
Options That Wo ...
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1. Francesco Bolzonella, Rachelle DuBois, Gonzalo Etchart, Guido Heins & Jules
Linden
Financial sustainability and benefit
adequacy of the pension system in
Uruguay
2. Presentation Overview
Demographic,
labour force
and
employment
• Analysis
• Projection
Pension
system in
Uruguay
• Design
• Intrinsic objectives
Contributory
pension
system
• Design
• Analysis
• Projections
• Financial
sustainability
Non-
contributory
pension
system
• Design
• Analysis
• Projections
• Financial
sustainability
Overall
financial
sustainability
• Analysis
• Parametric reforms
• Recommendations
for model
3.
4. Employment data
Assumptions
Indexation rate = 2.58% = wage
growth
Constant unemployment rate per
age from 2025 onwards:
Male Female
15-24 20.9% 29.9%
25+ 3.9% 6.6%
Source: (Index Mundi,
2018)
Unemployment rate in Latin Am
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
Expenditures on old age…
Coverage rates
Old age dependency ratio
Wage growth…
Inflation (CPI)…
GDP growth…
Uruguay in the regional Context
Uruguay Latin America
8. Design of overall pension system
Pillar 0
Social Pension
Pillar 1:
Social Insurance defined-
benefit PAYG scheme
(mandatory)
Pillar 2:
Individual Savings
retirement scheme
(mandatory Individual
Account)
Pillar 3:
Voluntary pension
savings
Non-contributory
pension
Employed and self-
employed – 15% gross
monthly wage
contribution rate
Employed and self-
employed – 15% gross
monthly wage
contribution rate
Voluntary deposits
and agreed
deposits (3rd
person, e.g.
employer)Employer contribution =
7.5%
No employer
contribution
Needy elderly and
disabled, age 70+
< 48,953 pesos (monthly
earnings)
48,953< 74,128
Open to all
Voluntary for < 48,953
pesos
9. Intrinsic objectives and impacts of the pension
system
Contributory pension Universal pension
Overall
objective
Address falling incomes during
economic inactivity
Smoothens live-time consumption
Address old-age poverty
Source of
finance
Leverages the demographic dividend
to accumulate resources during times
of employment expansion
Leverages expansion of
government revenue
Impacts Replaces 45% of average of last ten
years of wage
Allows for continued consumption
Eliminates old age poverty
Transfers higher amounts to
persons without a pension
11. Design of contributory pension scheme
Component Assumption
Contribution rate 15%
Pension age 60
Years of contribution 30 (+1 for each child for women) (+X for workers in hazardous
Benefits 45% of reference earnings
+ 1% of reference earnings for each year of contributions from 31-35 years
+ 0.5% of reference earnings for each year of contributions from 36-40
Minimum: 10292.65 pesos
Maximum: 40386 pesos (SI+IA) or 59723 (SI only)
Deferred pension Until age 70 or 35 years of contribution
Reserve 363.198.000.000 pesos in 2018
Indexation rate 2.58%
12. Assumptions on contributory pension scheme
Component Assumption
Administrative
cost
1% of reference earnings
Retirement age Everybody retires fully at 60 years old
Years of
contribution
Everybody contributes 30 years exactly
Work formats No hazardous occupations
Benefits 45% of yearly average per capita wage
Deferred No deferred pension
Contribution 15% (We do not consider the 7,5% Employer
Coverage rate 70%
13. Analysis of contributory pension scheme
The tables on the right side illustrate the above average standards of Uruguay within regional
comparison. Among the 19 countries, Uruguay falls within the category with the most progressive
schemes, where coverage is around 70%, though still lower than international standards.
14. Analysis of contributory pension scheme
The contributory pension scheme:
Aging Population
Lowering contributory base over the years
Low fiscal sustainability
PAYG rate rises up to 25,57% (Exp/TotIns)
2035 the scheme will be in Deficit
Reserves deployed in 2062
15. Projection of contributory pension scheme
With a variation in annual wage growth
between - 4% to 2.58% we notice a large
shift in expenditures and income, overall
increasing significantly across the century.
We projected also differences in
contribution rate, with a variation of 5%
from the standard 15%. The direct
implication should be increase the general
income, though we surprisingly see also an
increase in annual deficit.
19. Design
Pension age: 70 or 65+ in a
needy household
Benefits: 9444 pesos a
month
Indexation 2.58%
Assumptions
Administrative
cost:
1% of expenditure
Needy
household:
70% of people that
do not qualify for
contributory
scheme
Retirement
age:
65
The non-contributory pension (PNC)
includes two components: old age and
disability. This benefit corresponds to the
Pay-As-You-Go system. The benefit
provided by this pension corresponds to
an economic benefit generated directly
by individual people, regardless of their
work activity or nationality
21. Projection of non-
contributory
scheme
In 2002 the beneficiaries of old-age and
disability PNC totaled 64,170. This number has
increased in the following years at an annual
rate of 1.96%, amounting in 2006 to 69,359.
Number of recipients for the non-contributory
scheme account for 87,393 in 2018 and is
expected to surpass 24 million recipients in
2118.
This group of pensioners consists of Uruguayans
above the age of 65 years old who qualified as
disabled or have been declared in poverty
through a mean income test.
Average pension wage in 2018 was $9444 pesos
and is expected to rise till $120,000 pesos over
the projection period in accordance with
indexation rates and wage growth assumptions.
22. Projection of non-
contributory
scheme
Total expenditures on non-
contributory systems rises are expected
to reach 25 billion pesos by the end of
the 100 year projection.
This is explained by a rising number of
non-contributory pensioners and a
rising average pension wage that
keeps up with inflation.
However, expenditure as a percentage
of government revenue cost is
relatively small (0.6%)
24. Financial sustainability of overall pension system
0.0%
20.0%
40.0%
2018
2027
2036
2045
2054
2063
2072
2081
2090
2099
2108
2117
Rate total expenditure/government
revenue
The overall pension system consists out of 2
financially independent schemes.
Contributory scheme: financed under PAYG
scheme
Financial sustainability contingent on high
returns on investment given high reserves.
Non-contributory scheme: financed through
general government revenue
Financial sustainability contingent on
government revenue growth being higher
than expenditure growth
Overall scheme highly dependent on stable
economic performance.
0
0.0005
0.001
0.0015
0
1E+10
2E+10
3E+10
2018
2025
2032
2039
2046
2053
2060
2067
2074
2081
2088
2095
2102
2109
2116
Expenditures
Expenditure Total expenditure as % of GDP
25. Parametric reform: years of service
With a variation in years of service between 35 and 25 we also see a
prominent impact on overall expenditures in relation to insurable wages.
The reason is that lower contribution rate means higher number of
retired in proportion to contributors.
28. Improvemen
ts on the
model
1.No consideration of employer contributions (7,5%)
2.No consideration of disability or invalidity benefits (high risk
jobs)
3.No consideration of child bonus (replacement rate +1% per
child - up to 5 children)
4.No consideration of special system for bank employees,
notaries, university graduates, and military and police forces.
5.No consideration of mandatory individual accounts
6.No consideration of pension deferral and early retirement.
7.All persons past the age of 60 retire
8.Wage growth/indexation rate of 2.58 not suitable in periods
of high volatility and inflation (2018 rate of 6.22%)