Pension provision in Latin America has been radically reformed this decade. Many countries have borrowed key features from Chile's pioneering pension reform in 1980. Individual capitalisation pension plans are competitively provided by private firms specialising in managing pension funds. People place their contributions with a pension fund manager who then invests the money in a range of assets over the long-term. At retirement, the individual receives regular pension payments from the accumulated capital fund. The new system has replaced many long-standing social insurance pension schemes in Latin America. Recent research at the University of Hertfordshire has examined the effects of the reforms. Will they prove to be innovative and increase private savings, improve financial markets, open up labour markets, and lead to economic growth?

In Latin America, social security developed early this century following social insurance principles. This meant that individuals paid contributions according to their earnings to build up a pension, as well as securing benefits to cover unemployment or ill health. 'Pay-as-you-go' schemes were often provided by the state or semi-public organisations such as trades unions. Inflation in the 1970s and recession in the 1980s placed enormous pressure on social insurance funding, leading to the recent spate of reforms. Some countries have opted for a mixed system of private and public provision. For example, between 1993 and 1997 Peru, Argentina, Colombia, Uruguay, and Costa Rica introduced individual capitalisation pension plans alongside a public sector pay-as-you-go pension scheme. Other countries, such as Mexico, Bolivia, and El Salvador, have followed Chile in fully replacing their social insurance pension schemes with individual pension plans.

A key finding of the study is that proponents of reform have overstated both the flaws of the former social insurance pension schemes as well as the benefits of the new individual capitalisation pension plans. Specific findings highlight that:

• changes in labour market conditions in the 1980s contributed to the financial pressures felt by the old social insurance plans;
• new pension plans are unlikely to reduce economic insecurities faced by vulnerable low-wage or temporary workers;
• the proportion of affiliates making regular contributions to their pension plans has actually declined since reform;
• the new pension schemes have high administration and marketing costs.

Findings with significance for policymakers include the following:

• Individual pension plans inherently deepen inequalities in income distribution in old age
• Shifting to private provision reduces insurance against health problems or periods of unemployment
• Pension reform by itself is unlikely to generate large increases in private saving
• The new pension fund management sector could play an important role in the modernisation of financial markets
• Government regulation and supervision of the new pension fund schemes is vital for their success.

Source(s):
Pension Reform in Latin America, Ashgate, Aldershot, by A. Barrientos, 1998 > Full document.
Pension reform, personal pensions and gender differences in pension coverage, World Development 26 (1) 125-137, by A. Barrientos, 1998
The Changing Face of Pensions in Latin America: Design and Prospects of Individual Capitalisation Pension Plans, Social Policy and Administration 31 (4) 336-353, by A. Barrientos, 1997

Funded by: Not known

id21 Research Highlight: 18 June 1999

Further Information:
Armando Barrientos
University of Hertfordshire Business School
Mangrove Road
Hertford
Herts.
SG13 8QF
UK

Tel: +44 (0)1707 285462
Fax: +44 (0)1707 285489
Contact the contributor: a.barrientos@herts.ac.uk

University of Hertfordshire

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