Matching Contributions

schemes for

informal/middle-class

workers in Latin America:

work in progress

Angel Melguizo

Labor Markets and Social Security Unit – IDB

World Bank Pensions Core Course

Washington DC, April 10, 2013

Emerging informal middle-class workers and

pension savings

Matching contributions in theory and practice (Latin

America)

Preliminary lessons and the road ahead

Outline

Pension coverage is low, reflecting low

contributions during working life

Especially among low and also middle- income population, and

will remain low in absence of further reforms (except Chile)

Workers contributing to a pension scheme by income level (% total workers 14-64 years)

Source: Da Costa et al. (2011) and Carranza et al .(2012)

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

Disavantaged

Middle sectors

Affluent

2006 CHL 2009 COL 2006 MEX 2010 PER

Low contributions among middle-income

workers reflect high labor informality

One third in Chile, and two thirds of middle-income workers in

Colombia, Mexico and Peru work without a written contract

Distribution of non-agricultural middle-income workers by occupation (% total workers 14-64 years)

0.0

0.2

0.4

0.6

0.8

1.0

2006 CHL 2006 MEX 2009 COL 2010 PER

Formal Self-employed with tertiary education

Non-agricultural informals Non-agricultural self-employed

Source: Da Costa et al. (2011) and Carranza et al . (2012)

Informality among middle-income workers

also reduces severely pension savings

Middle-sector workers contributing to a pension scheme by occupation (% total workers 14-64 years)

Source: Da Costa et al. (2011) and Carranza et al. (2012)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Formal Self-employed with tertiaryeducation

Non-agricultural informals Non-agricultural self-employed

CHL 2006 2009 COL MEX 2006 2010 PER

However, emerging and informal middle

classes can be a driving force of change

Middle-income informal workers (urban) can play a more active

political, social and economic role, strengthening the social

contract:

– Around 20 million people (3.5 million in Colombia, 12 million in

Mexico and 4.5 million in Peru) vs. 11 million formal

– Earn well above moderate poverty lines (between 1.5 times in

Mexico and Peru, and 2.5 times in Colombia), showing some

savings capacity

– But their labor earnings are in line with minimum wages in

Colombia and Peru (possible source of labor market and

pension functioning distortions)

A particularly interesting population

segment are younger workers

In Chile, the policy focus had been on younger workers,

subsidizing formal employment:

– Unemployment rate among 20-24 years old Chileans is more

than twice the average (15.4% vs. 6.6% in 2011q4)

– More of lower-income youth (56% in decile 1) are inactive or

looking for a job without attending education

– Prospects of low and unequal pension levels

– Better alternative than relying on the Solidarity Pillar (for fiscal

and adequacy reasons)

Emerging informal middle-class workers and

pension savings

Matching contributions in theory and practice (Latin

America)

Preliminary lessons and the road ahead

Outline

‘Matching contributions’ are one of the most

promising options to address coverage

Governments’ incentives to increase contributions to pension

schemes, though two channels:

– Financial, increasing returns to savings

• lower contributions for the same pension level (i.e.

progressive or focalised contribution subsidies)

• higher pension level for the same amount of contributions

– Behavioural, easing processes

• reminders

• opt-out schemes and default options

Informal urban middle classes are, probably, the ones more

prone to participate in these schemes

‘Matching contributions’ are being

implemented in various forms in LAC

Chile implemented contribution subsidies them for younger

workers:

– Subsidio Previsional a los Trabajadores Jóvenes: 50% of

pension contributions for low income (<1.5 min wage) workers

aged18-35 years, during 24 months: to the employer (since

2008), and additionally to the workers (from 2011)

– Subsidio al Empleo Joven: Inverse-U subsidy (2/3 to the worker

and 1/3 to the firm) to the 40% poorest younger workers (18-25

years)

Mexico thought about it, and partially implemented them:

– Cuota Social: 5.5% of minimum wage of DF matching by

government for affiliates up to 15 min wages

‘Matching contributions’ are being

implemented in various forms in LAC

Colombia and Peru are the most interesting cases, in the

process of implementation:

• Sistema de Pensiones Sociales (PER): Subsidized

contribution cut for low income (<1.5 min wage) workers and

owners of small firms (<10 workers) to get the same pension

Beneficios Económicos Periódicos ‘Beps’ (COL): 20 per cent

ex-post match to low income workers (<1 min wage) to top

up voluntary savings; plus short-term benefits (insurance,

administrative costs)

Activism contrasts with a lack of empirical

evidence about their effectiveness

Weak evidence on the impact of

financial incentives

– Imperfect data (e.g. IDB Survey in

Lima-Peru)

– Affiliation>contribution

– Processes (‘secondary design

elements’) may be as important

(default option, thresholds…)

No study on the impact of

processes for Latin America

– Employee, firm and government roles

matter

– IT, opt-out, save more tomorrow;

mobile agencies (banks-post)

– Evidence (US: Google employees,

H&R Block clients, SMarT)

Potential response to matching schemes in Peru (% working-age population)

Source: EPS-BID 2008, Peru

37%

34%

27%

30%

22%

23%19%

18%

16%13%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Q1 Q2 Q3 Q4 Q5

Contributing If 1/4 subsidy If 1/2 subsidy Would not contribute

Emerging informal middle-class workers and

pension savings

Matching contributions in theory and practice (Latin

America)

Preliminary lessons and the road ahead

Ouline

Matching Contributions’ designs so far

pose more questions than answers…

Targeted towards low- or low middle (at best) workers: savings

capacity?

Not clear address of firm vs. employee roles

– In particular: the costs of formality (pensions and health); increase of

future benefits: credible?

Temporary or permanent effects?

Net increase in formality or mere compositional (age) effects?

Matching Contributions’ designs so far

pose more questions than answers…

Limited to financial incentives

- No initiatives to address non-financial barriers such as cognitive costs,

procrastination, status quo bias (Caution: Beps regulation is being

developed these days)

Potential economic and pension distortions in Peru: favoring

small firms, plus de facto creating an additional pension

scheme for new entrants

Summing up

Matching Contributions are not the silver bullet, but an

useful ingredient:

They can reach the emerging informal (urban)

middle-class workers

An integrated combination of subsidised social tax

cuts, plus voluntary matching schemes could trigger

pension contributions (plus an universal pension)

Work in progress: combination of adequate financial

incentives, with effective behavioral channels

Quoted references

Costa, R. Da, J.R. de Laiglesia, E. Martinez

and A. Melguizo (2011), “The Economy of the

Possible: Pensions and Informality in Latin

America”, OECD Development Centre

Working Paper 295. OECD, Paris.

Carranza, L, A. Melguizo and D. Tuesta

(2012), “Matching Contributions in

Colombia, Mexico, and Peru: Experiences

and Prospects”, in R. Hinz, R. Holzmann, D.

Tuesta and N. Takayama (eds.), Matching

Contributions for Pensions, pp. 193-213. World

Bank, Washington DC.

von Gersdorff, H. and P. Benavides (2012),

“Complementing Chile’s Pension Scheme

with Subsidized Youth Employment and

Contributions”, in R. Hinz, R. Holzmann, D.

Tuesta and N. Takayama (eds.), Matching

Contributions for Pensions, pp.179-192. World

Bank, Washington DC.

http://www.iadb.org

The Inter-American Development Bank Discussion Papers and Presentations are documents prepared by both Bank and non-Bank

personnel as supporting materials for events and are often produced on an expedited publication schedule without formal editing or

review. The information and opinions presented in these publications are entirely those of the author(s), and no endorsement by the

Inter-American Development Bank, its Board of Executive Directors, or the countries they represent is expressed or implied.

This presentation may be reproduced with prior written consent of the author.