The changing face of pensions in Latin America

25th March 2014

MGI World The changing face of pensions in Latin America

A rise in the number of people across Latin America who are entitled to pensions is posing a challenge to businesses and governments across the region.

At present there are approximately 290 million people of working age in Latin America, according to a new report from the World Bank. Only 45 per cent contribute to a pension system, leaving 160 million people without any provisions for later life.

Often this results in people working beyond retirement age and into old age. Or they rely on savings or on family. All of these have an economic impact, particularly if younger family members are being forced to spend on their elderly relatives.

But, according to the World Bank report, it doesn’t have to be this way. “One solution to this problem would be to improve labour market formality to ensure that workers make regular contributions. At any rate, to resolve the situation of many older adults requires moving beyond traditional contributory pensions,” says Rafael Rofman, World Bank pension expert and author of the study 'Beyond contributory pensions in Latin America and the Caribbean'.

Economic growth over the last decade meant more people entered contributory systems. While just 45 per cent of workers contribute to a pension system, it is up from 35 per cent 15 years ago.

Because of the changes to their economies, Latin American governments became convinced of the need to establish reforms in pension systems. Changes across the region mean that 11 million adults over age 65 who had been excluded from such systems were able to receive benefits.

But the problem now is that while rolling out pension provision was relatively easy in the boom years, it’s going to be a lot harder now as emerging markets are squeezed. As the report notes, the biggest challenge will be to guarantee pensions in less favourable economic situations. Essentially, countries of all colours will need to find the cash to pay for greater provision.

“These strategies appear to be working and the overall situation is improving. However, two clear challenges remain: one is political, social and design consolidation whereas the other is fiscal sustainability, in other words, they have to be paid,” says Rofman.

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