The accelerated aging of the population in Latin America in the coming years threatens current pension and health services systems, so governments must begin to take measures to ensure that young people can access adequate protection when they reach old age. In most of the countries of the region, greater spending is necessary to improve the protection provided by these systems, states the Economy and Development Report (RED 2020), published this Tuesday by the Development Bank of Latin America (CAF).
Currently, about 8% of Latin Americans are over 65 years old, a distant figure, for example, from that of Europe, where this sector represents almost 20% of the population. However, it is estimated that this portion will more than double – to 17.5% – by 2050, and will exceed 30% by the end of the century. In most countries, spending does not reach a sufficient level to meet social protection needs.
The report focuses both on the components related to the protection of the elderly and on the aspects of the labor market that condition the coverage of pension systems and their financing. “On the one hand, older adults make up a segment of the population particularly subject to health risks and insufficient income. On the other hand, these components cover an important part of public spending in Latin America, reaching, together, around 8.5% of GDP, ”explains Luis Carranza, CAF’s executive president in the document.
Not everything is a matter of spending more, highlights the report. In most countries there is a significant margin to increase efficiency and, always according to CAF’s analysis, coverage could be increased by an average of 10.6% with the same expense. Given that the average gap in the coverage ratio with respect to the Organization for Economic Cooperation and Development (OECD) average is 13.4%, almost 80% of that gap could be closed through efficiency improvements.
Added to the challenge posed by this accelerated aging of the population – and the challenge it entails for the financial sustainability of the health and pension systems – are labor informality and the trend towards digitization and automation of production processes. “Advances in digitization and automation, although incipient in the region, could have disruptive effects on work trajectories, especially among those workers who perform relatively more routine tasks. This factor would negatively impact the taxpayer base of social protection schemes, ”says Carranza.
Reforms to face demographic changes or close some gaps in social protection systems run up against multiple obstacles, CAF warns. A central problem is that they can generate resistance or be financially unviable, since while the costs are assumed in the short term, the benefits tend to be seen gradually and in the long term. The report outlines some principles to guide future reforms. Among others, review the minimum retirement ages in some countries; the need to promote the obligation to make retirement contributions for all workers, including the “self-employed”; and reducing the minimum contribution year requirements in places where they are too high due to the impact of informality.
“Many countries have practically no margin to increase revenues through higher contributions, but there is greater potential for tax collection through an increase in the number of taxpayers,” says CAF’s executive president. To achieve this, it is essential to promote greater labor participation by women and, above all, to reduce informality. “In addition to implementing policies to increase the income of social protection systems, some countries have fiscal space to meet the demands of higher spending with an increase in tax collection,” he adds.
In order to achieve the approval and successful implementation of eventual reforms, a key aspect is to incorporate gradual change mechanisms, the report highlights. “On the one hand, purely economic factors generally require relatively smooth transitions. On the other hand, from the point of view of political economy, reducing resistance to the proposed changes often requires introducing gradual changes that do not affect a significant part of the population, at least in the short term ”. One way of reducing resistance to reforms in pension systems, according to international experience, “is to exclude those who are already retired or relatively close to retiring from the application of the new rules.”