Session: 59

Social Security

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Summary

Most of the security pension systems of Latin America shows an obvious financial crisis. Latin American countries are making a thorough transformations because of this crisis.

Nevertheless, these reformations have change around completely the technical and methodological basis on what pensions and insurance calculations are based. There are not risk redistributions.

There are different proposal of changing, but most of them are based on an individual capitalization saving account for the retirement age.

One of the strong restrictions received is that new pension saving system doesn't define the quantitative profit to the thrifty person, in our case, the worker. This happen because is impossible to predict the yield rate of these funds.

In Latin America Chile is the pioneer in this matter, and it's developed and growing economy makes a point to many countries, whom are strongly forced to change their pension systems. On the other hand, it is important explain that still is early to evaluate the results of their new pension system because only twenty years had passed since its implementation, and people have not begin to claim their retirement savings.

These obligatory savings had generated a large capital that is managed by the pension funds administrator (AFP), even though the investment law is very close, in the Chile case, most of these funds had contributed in the development of the financial market, making this country economy one of the stronger of the area.

But these funds, generated by the obligatory savings, are created in order to provide a pension and must be invested in instruments that assume their good management and let its availability at the moment the law is on the side of the worker.

The problem comes on the worker saving capacity, their salaries levels and the high fiscal deficit generated when public system turn into a private system.

Besides Chile, Bolivia, Mexico, El Salvador and Nicaragua (recently) changed to an individual capitalization saving account pension system for the retirement. Argentina, Uruguay and Costa Rica decided develop and settle a mix model with a sharing administration.

The mix model offers the best of both system, the individual capitalization saving account and sharing out system, are different from the parallel model, its promotes the competition between social security pension system with indefinite profit pension system.

Actually, Panama keeps a social security pension system, in words of Dr. Carmelo Mesa Lago, in its "Report about panamenian social security reformation", he called it "sharing out or Collective Partial Capitalization (CPC) System".

According to "Financial and Actuarial Integral Valuation of Panama Social Security Found" proposed by International Labour Office (OIL), the invalidity, Old age and death programmed shows an increasing actuarial deficit and predict a pension fund deficit that begins in the year 2014, if the disciplinary measures are not observed.

In a study made by the author of this article, with a sample of 100 workers who received a normal pension throughout January to December 1999. Their salary history was analyzed and their last salary substitution rate was calculated according to the rate they would received into a capitalization saving account pension system.

Their salary history was researched since they began to pay a quote to the social security fund until their retirement age.

A simulation into an individual capitalization saving account pension system was practiced, and the yield rate was calculated between ranges of 5 % constant through all its labour life.

At constant 5% capitalization rate, neither reaches a substitution rate over the 30%. For a constant 6% rate, hardly one worker reach a substitution rate of its last salary by 47.20 %, all of this on this basis of the gained yield into an individual capitalization account for the retirement.

At constant 7% capitalization rate, only one from the 100 sample reach the 100% substitution rate of its last salary, and two workers get over a 60% substitution rate of their last salary, with the yield obtained into an individual capitalization account for retirement. 

At constant 8% and 9%, is found that 97% of the sample didn't reach a substitution rate over the 50 % of their last gained salary.

It is important to appoint, from 100 salaries histories, only three histories obtained a substitution yield of their last salaries over the 60%, with a constant yield of 9% because these workers, in the beginning of their laboral lifes, they gained higher salaries compared to their last years salaries, before their retirement age and also before complete the required quotes to get a profit. A 9% is a high yield rate if is compared with the interest rates that are managed in the financial markets of " dollarized economics".

The Panama Social Security law established that to obtain the retirement pension, besides reach the retirement age (men 62, women 57), must have 180 months quote. The monthly pension amount is the 60% of the average salaries corresponding to the best 7 years quotes accredited in its individual account plus 1.25 % for each twelve complete months of quotes that a worker has in excess of the 180 required quotes. Comparing the pensions obtained under Panama Social Security Fund actual system against those studied under the capitalization saving account pension system, we notice clearly that 93% of substitution rate is under the 50% of the last reported salary. The profits gained into the individual savings accounts for the retirement system don't guarantee even a pension that allow the workers can survive with their elementary needs.

On the other hand, we found annual salary growing rates under 5% result of the estimation of annual average rate salary growing is 3%.

A study about the behavior of 100 workers salary history sample was realized. In this descriptive analysis is notorious that most of the workers are concentrated in low salaries range.

Conclusions are obvious and clear, individual capitalization saving accounts system can not substitute the social security pension system, because don't are a guarantee to a decent and proper retirement pension at the moment that any worker gets its retirement, no less in Panama case where is demonstrated by the research. 

In definitive profit system don't fulfill the most important social security principles, solidarity, equity and universality.

It is important to appoint that we cannot establish an average salary carrier representative of the behavior from all workers salary histories because each one history has its own unique, varied and particular behavior. However, there are a large numbers of workers that can't reach salaries over 300 dollars along their labour life, this means that their saving capacity is very low.

Finally, we should say that individual saving accounts system may be a good complement to social security pension system but not substitutive, because of the reasons explained before."

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