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

Hernando Nossa

Low pension coverage in LAC: 4 out of 10 among

pop. 65+ do not get a pension

(National Household Surveys data)

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)

Pension savings are low for non-wage earners,

workers in small firms, or low-income workers …

… but also for the emerging middle class

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

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

… 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

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?

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.

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

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)

Better Pensions and Better Jobs

Average annual cost for LAC = 1.5% of GDP

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

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

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

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

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.

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