Debunking myths about social protection
How can we get a pension?
In Paraguay, people contribute less than 30% of the time they could to a pension system, whether due to being in informal occupations, in unpaid carework, or due to the lack of knowledge of workers and employers about their right to social security. We talked to social protection specialists about the particularities of IPS and alternatives so that more Paraguayan men and women access their right to old-age income security.
26 May 2023
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“Only a minority of the workers will be able to receive a pension, based on the current rules of the game”, affirmed Braulio Zelko, economist and co-author of the report The density of contributions to IPS in Paraguay, 2022. In said work, Zelko and Hugo Bai analyzed the labor history of workers in the national social security institute (IPS), and found that, on average, the members contribute 28% of potential time in their active age to the system.
This 28% is IPS’s contribution density indicator. It measures the quantity of contributions of contributing members in relation to the period of potential time. The researchers took the data of contributing members aged 18 to 65, their active work years, and observed the number of months these people effectively contributed to the system. “Half of them had a contribution density equal or lower than 20% of their active working life. This leads to very few people being able to meet the conditions required to access contributory retirement”, Zelko pointed out.
The numbers found in the report respond to diverse structural factors of Latin American job markets, like that of Paraguay. There people who register two years of contributions and then several years of inactivity. Some people take on formal jobs for a while and then then take on an informal one. Informality affects nearly 7 out of 10 members of the economically active population and, to a larger extent, young people and women. “We always talk about the formal and informal sector, thinking they are two very different structures, that you are either in one or the other. What we see in Paraguay is that there is a significant movement of workers between one sector and the other”, affirms Guillermo Montt, ILO Social Protection Specialist.
But it’s not just informality that explains this low contribution density. Other people leave their jobs to care for children, adolescents, older people with dependency or people with disabilities. Other people leave formal work because of an economic crisis, or to start an independent business. This variation causes that, instead of accumulating years of contributions, they accumulate gaps.
Hugo Bai, economist and co-author of the report, specified: “Some 57% of workers will not meet the requirements to access a pension. 43% will access a contributory pension composed by 31% who will access a proportional retirement pension, which can be obtained with 65 years of age and 15 years of contribution; 9% who will access a normal retirement pension, which is obtained at 60 years of age and 25 years of contribution; and less than 2% who will access an early retirement, which is obtained at 55 years of age, if the person reaches 30 years of contributions to the system”.
Currently, IPS is a defined benefit system. In his words: “People who are contributing today, contribute to pay the retirement of those who are retiring”. The problem is that with the current retirement pension rules, many of the lower income workers, who contributed to pay for the current retirements, will not meet the requirements to retire. This, in practice, ends up being a cross-subsidy from lower- to higher-income workers.
“There is a group that contributes more; that contributes their whole career and is often the group that has access to better paid and more stable jobs. But the majority of people in Paraguay, either never contribute or does not contribute enough to receive a pension”, Guillermo expressed.
Flexible scheme and a variety of instruments
The worldwide trend, according to the ILO’s specialist, is to work with a variety of contributory and non-contributory schemes to ensure universal coverage and offer income security in old age:
The social security system can also generate more flexible schemes, expanding the access rules. It is not necessary for people to contribute 100% to access a pension, but rather a scale can be enabled that allows a pension proportional to the contribution.
“At 10 years you have access to a low pension, at 15 you are increasing it, and thus raising it, to not have that pressure of having to gather those 20 years while knowing that many people will not accumulate those contributions. So, if we think of it as a race, we would not only be rewarding the first place finishers, but also the second, third, fourth place, and so on”, Montt affirmed.
To the expert, it is important that workers and employers understand that retirement, as a fundamental part of social security, is a right for everyone and not just a privilege of a few. A system with universal coverage, sustainable and appropriate benefits, that complement each other, will benefit citizens and society as a whole.
*This contents do not necessarily reflect the views of the European Union.
This 28% is IPS’s contribution density indicator. It measures the quantity of contributions of contributing members in relation to the period of potential time. The researchers took the data of contributing members aged 18 to 65, their active work years, and observed the number of months these people effectively contributed to the system. “Half of them had a contribution density equal or lower than 20% of their active working life. This leads to very few people being able to meet the conditions required to access contributory retirement”, Zelko pointed out.
The numbers found in the report respond to diverse structural factors of Latin American job markets, like that of Paraguay. There people who register two years of contributions and then several years of inactivity. Some people take on formal jobs for a while and then then take on an informal one. Informality affects nearly 7 out of 10 members of the economically active population and, to a larger extent, young people and women. “We always talk about the formal and informal sector, thinking they are two very different structures, that you are either in one or the other. What we see in Paraguay is that there is a significant movement of workers between one sector and the other”, affirms Guillermo Montt, ILO Social Protection Specialist.
But it’s not just informality that explains this low contribution density. Other people leave their jobs to care for children, adolescents, older people with dependency or people with disabilities. Other people leave formal work because of an economic crisis, or to start an independent business. This variation causes that, instead of accumulating years of contributions, they accumulate gaps.
Hugo Bai, economist and co-author of the report, specified: “Some 57% of workers will not meet the requirements to access a pension. 43% will access a contributory pension composed by 31% who will access a proportional retirement pension, which can be obtained with 65 years of age and 15 years of contribution; 9% who will access a normal retirement pension, which is obtained at 60 years of age and 25 years of contribution; and less than 2% who will access an early retirement, which is obtained at 55 years of age, if the person reaches 30 years of contributions to the system”.
Currently, IPS is a defined benefit system. In his words: “People who are contributing today, contribute to pay the retirement of those who are retiring”. The problem is that with the current retirement pension rules, many of the lower income workers, who contributed to pay for the current retirements, will not meet the requirements to retire. This, in practice, ends up being a cross-subsidy from lower- to higher-income workers.
“There is a group that contributes more; that contributes their whole career and is often the group that has access to better paid and more stable jobs. But the majority of people in Paraguay, either never contribute or does not contribute enough to receive a pension”, Guillermo expressed.
Flexible scheme and a variety of instruments
The worldwide trend, according to the ILO’s specialist, is to work with a variety of contributory and non-contributory schemes to ensure universal coverage and offer income security in old age:
- Non-contributory scheme: The State funds part of the pension.
- Contributory scheme: People contribute to their retirement and that of contributors, with solidarity mechanisms that compensate those who contributed, but that do not reach to access a complete retirement or wo contributed through lower-paid jobs.
The social security system can also generate more flexible schemes, expanding the access rules. It is not necessary for people to contribute 100% to access a pension, but rather a scale can be enabled that allows a pension proportional to the contribution.
“At 10 years you have access to a low pension, at 15 you are increasing it, and thus raising it, to not have that pressure of having to gather those 20 years while knowing that many people will not accumulate those contributions. So, if we think of it as a race, we would not only be rewarding the first place finishers, but also the second, third, fourth place, and so on”, Montt affirmed.
To the expert, it is important that workers and employers understand that retirement, as a fundamental part of social security, is a right for everyone and not just a privilege of a few. A system with universal coverage, sustainable and appropriate benefits, that complement each other, will benefit citizens and society as a whole.
*This contents do not necessarily reflect the views of the European Union.