1. ILO on line: How has the new approach to
public pension in Latin America fared?
Fabio Bertranou: Pension reforms have
been one of the major social and economic changes
in several countries in the region over a period of
20 years. However, they have been costly in fiscal
terms and have only benefited a small fraction of
the labour force, mostly the better off in the
labour market. After more than two decades of
"structural" pension reform in the
region, there is a great variety of experiences
with quite mixed results.
But there are also interesting experiences of non-structural reforms, the so-called "parametric" reforms, such as the case of Brazil, the largest and most populated country in Latin America. While parametric reforms have improved the financial position of pension systems in the long run, privatization has created a short-term fiscal problem given that many governments have not been able to run a fiscal surplus to compensate the loss of contributions allocated to private accounts.
The other important variable to look at is coverage. This has remained stagnant. Even though one of the most salient premises for the reforms was that the linkage of contributions with benefits would be an incentive yielding a higher formalization of the labour force and better compliance with contributions, the results have been disappointing.
2. ILO on line: Have the changes left workers
and their families in reform countries better off?
Fabio Bertranou: The results are
diverse. Workers with stable working life careers
and relatively high earnings will fare
satisfactorily, they will even be better off
because the reforms have also introduced a
voluntary pillar that benefits from tax incentives.
Other workers, with less stable careers would have
benefited more from the old pension systems because
entitlement conditions were more flexible.
Furthermore, low-income workers with a highly unstable employment record will face enormous difficulties in getting a decent pension benefit or even any benefit at all. They may benefit from a welfare pension if the public households of these countries can accommodate higher social assistance expenditure.
3. ILO on line: Why not give people entering the
workforce the choice between a public and a private
system?
Fabio Bertranou: Actually, there are
countries that offer that possibility and we have
experiences with mixed schemes. I think, however,
that allowing choice between private and public
systems is not the solution for the "pension
problem". Choice could fragment the existing
systems even more, which the reforms tried to
avoid. The alternatives offered by countries like
Argentina, Uruguay and Costa Rica are quite
interesting. Even if they do not look like
successful experiences because other factors have
driven their economy, and with it their pension
systems, into a crisis.
4. ILO on line: What about transition costs of
pension reform - do reforms pay?
Fabio Bertranou: This a key issue in any
structural pension reform. Most of the studies
previous to the reform underrate and miscalculate
the fiscal implications of these types of reforms.
I would say that the pension reform looks
successful in Chile not because it is well designed
but because the reform process was adequately
handled and accompanied by economic growth,
political stability and a sufficient institutional
capacity.
5. ILO on line: Would you change anything about
private pension systems in Chile or other Latin
American countries?
Fabio Bertranou: My main objection to
the new pension and reform process is that the
second private pillar received too much public
policy attention, while the first public pillar
which constitutes the basis of any social
protection system for the elderly was neglected in
many countries. For instance in Chile, there is a
minimum pension but only for those who contribute
at least 20 years and have accumulated very little
in their individual accounts. There is also an
assistance or welfare pension that pays a very
modest benefit.
Even though Chile has the best performance in Latin America in terms of labour force contributions to the pension system, the State pays a high number of social assistance pensions. In fact, the Chilean high rates of coverage at old age have increased because of the steady growth in welfare pension benefits while coverage through contributory private and public schemes, has been stagnant or declining.
6. ILO on line: What about the risks of private
retirement plans?
Fabio Bertranou: Private plans are
costly and this should be compensated with high
rates of return. This has been the case for most
Latin American countries over the last years but it
is improbable that this can be maintained in the
long run. The main risks, however, are high
investments in public bonds because the governments
have not only to finance the transition but also a
loose management of its fiscal policy. In this
context, governments were eager to secure resources
to finance the fiscal deficit by absorbing them
from social security pension funds.
What is surprising is that privatization was supposed to isolate the systems from political interference and the effects of economic cycles that usually affect the financing of public schemes, but they are still subject to a great risk because of the same public sector behavior. This is one of the major lessons from the Latin American experience: it is impossible to isolate a private pension scheme from governmental policies, economic and political turmoil or external shocks.
7. ILO on line: Who benefits most financially
from the Chilean system: the people or the private
fund administrators?
Fabio Bertranou: Private administration
of pension funds is a profitable business in most
Latin American countries that have introduced the
so-called "AFPs" (fund administrators).
In Chile, the people in general have also benefited
from the macroeconomic effects of this reform given
that it helped to develop the capital markets, the
insurance sector and provided resources to finance
the expansion of credit market to finance mortgages
of new home owners.
However, I am concerned about the distribution of benefits. As I said before, the people in the system and with stable working life careers are the ones benefiting from this new order. It is estimated that only 50 per cent of current affiliates will have enough contributions to finance or qualify for a minimum pension. The average replacement rate the new system is providing is also very modest: about 45-48 per cent!
The problems in other Latin American countries are even worse: most of the labour force is not covered by neither the new systems nor the old ones: coverage in Argentina, for instance, barely trespasses the 30 per cent mark, in Peru it is about 15 per cent, and in Bolivia 10 per cent. The bottom line is that the reforms were not designed to be more inclusive and this will create new types of inequalities and exacerbate existing ones on the labour market.
8. ILO on line: How do you think pensions
systems can be improved in Latin America at the
end?
Fabio Bertranou: The case of Chile shows
the need to have "mixed systems" and not
only private ones. The State is not only regulating
and supervising the privately administered
component of the pension system, but also financing
minimum and welfare/social assistance pensions.
Coverage is the most important area where pension
systems need to be improved. The systems should
adapt their contributory components in order to be
more attractive for workers and employers.
Systems should be legitimized by a social consensus, including tripartite dialogue on these issues between governments, workers and employers. Latin America is the most unequal region in the world in terms of income distribution. There are huge numbers of workers with no contributory capacity because they have non-traditional forms of employment or because they are simply very poor. In such a situation, the social security instrument is a non-contributory scheme with an anti-poverty objective.
Other areas for improvement are the unification of fragmented schemes and the removal of privileges, the elimination of gender inequalities within the schemes and the strengthening of the institutional capacities of the schemes to deal effectively with administration, regulation and supervision.