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January 15, 2007
Document of the World BankR
eport No. 34154-A
R
Argentina
Facing the Challenge of A
geing and Social Security
Report No. 34154-AR
ArgentinaFacing the Challenge of Ageing and Social Security
Social Protection Unit, Human Development DepartmentArgentina, Chile, Paraguay and Uruguay Country Management UnitLatin America and the Caribbean Regional Offi ce
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N D C OECD PAP
PAYGO
PBU
PC
PEA
PMG PNC PTm RRP SAFJP
SIJyP
sss UAFJP
VAT
National Defined Contribution Pensions Organization for Economic Cooperation and Development Prestacih Adicional por Permanencia (DB earnings-related pension in public second pillar) Pay-as-you-go financing in which pay-roll taxes from current workers finance pensions o f current retirees Prestaci6n Bhsica Universal (Basic old age pension covering affiliates to SIJyP wi th 30 years contributions at 60 (women) and 65 (men)) Prestacih Complementaria (Pension recognizing rights acquired up to 1993 reform) Prestacih por Edad Avanzada (Advanced age pension for SIJyP affiliates with 10 years contributions at age 70) Prestacih Minima Garantizada (Guaranteed Minimum Provision) Pensi6n N o Contributiva (Non Contributory Pension) Prestaci6n Total Minima (Minimum Total Provision) RCgimen de Reparto P ~ b l i c o (SIJyP public second pillar) Superintendencia de Administradoras de Fondos de Jubilaciones y Pensiones (Regulatory authority over the commercial second pillar) Sistema Integrado de Jubilaciones y Pensiones (National old-age income security system) Secretaria de Seguridad Social (National Social Security Secretariat in MTEySS) Unidn de Administradoras de Jubilaciones y Pensiones (Pension and Retirement Association Union) Value Added Tax
Vice President: Pamela Cox Country Director: Axel van Trotsenburg Human Development Director: Evangeline Javier Human Development Sector Leader: Social Protection Sector Manager: Human Development Lead Economist: Task Team Leader: Truman Packard
Jesko Hentschel Helena Ribe Jennie Litvack
... 111
Table o f Contents
Terminology Used in this Report ......................................................................................... VIII
.. Acknowledgements ............................................................................................................. VU
Introduction, Structure. and Main Findings o f th is Report ........................................................ 1 I . Expanding coverage - Argentina’s key challenge in old age income security ....................... 1 I1 . Purpose and Structure o f th is Report ................................................................................. 5
IV . Looking Ahead .............................................................................................................. 11 Part I . A Framework to Guide Pension Policy and Analyze How Argentina Covers the Losses
from Ageing ........................................................................................................... 13 I.a. The Prospective Losses from Ageing and Objectives of Pension Policy .............................. 13 I . b . Argentina‘s Institutions for Old Age Income Support., ...................................................... 17 I.c. The Multiple Pillars of Old Age Income Security in Argentina .......................................... 19 I.d. Separate. Independent Pension Plans .............................................................................. 21 Part I1 . A Closer Look at Coverage o f the Elderly in Argentina: Empirical Findings ................. 22 I I .a . Patterns in Social Security Coverage in Latin American Countries .................................. 23 II. b . A Profile of Argentina’s Elderly .................................................................................... 25 I I c . D o Argentina’s Coverage Outcomes Reflect Exclusion or Preferences? ........................... 31 II.d . A Closer Look at Reporting. Contribution. and Evasion .................................................. 33 II . e . I s Continued Labor in Old Age a Viable Income Substitute for Social Security? ................ 37 Part I11 . Closing the Coverage Gap ...................................................................................... 42 III.a, The Distinctions Between “Pil lar 0” and “Pil lar 1 ......................................................... 42 III . b . Advantages and Drawbacks of Alternative Public Pooling Structures ............................. 43 III. c . Fiscal Costs of Direct Measures to Close Argentina’s Coverage Gap ............................. 45 III.d. Limited Deployment of Non-Contributory Pensions in Argentina., .................................. 51 Part IV . Principal Challenges for Social Security and Private Pensions in Argentina ................ 55 IV,a . Adequacy of the Commercial Second Pil lar: Portfolio Risk. Contribution Rate and the
Cost of Insurance .................................................................................................... 55 IV,b . The Deteriorating Value of Pensions and Fiscal Risks of Ad-Hoc Benefit Adjustments ..... 62 I V , c . The Multiplicity of Pension Plans ................................................................................. 64 I K d . SIJyP Regime Choice and the Competing Second Pillars ............................................... 67 I V , e . Remaining Vulnerability to Demographic Changes ........................................................ 71 Part V . Concluding Insights: Issues and Opportunities in Argentina’s Pension Reform Debate . 74 V,a . Restoring an Adequate Commercial Second Pil lar .......................................................... 75 V, b . A Purposeful and Predictable Policy for Benefit Adjustment ............................................ 77 V, c . Argentina’s Multiple Pension Regimes ........................................................................... 77 E d . SIJyP Second-Pillar Choices ........................................................................................ 78 Y e . The Retirement Age and Future Demographic Risk ......................................................... 79 V,$ The Deployment of Non-Contributory Benefits ................................................................ 79 V,g . Looking Even Further Ahead ......................................................................................... 81 References .......................................................................................................................... 82 Technical Annex . Data Quality Assessment o f the ETEEP ..................................................... 87
...
I11 . Summary o f Ma in Findings .............................................................................................. 7
iv
Tables Table 1 . Poverty among the Elderly .............................................................................................. 17 Table 2 . Argentina’s National Pension System through the Multi-Pillar Prism ............................ 20 Table 3 . Summary Statistics for Covered and Non-Covered Elderly, ETEEP 2003 ..................... 26 Table 4 . Characterization o f Contribution Density. by Individual and Household Characteristics
o f Reported Employment Episodes ............................................................................... 36 Table 5 . Characterization o f Contribution Density, by Size o f the Firm o f Reported Employment
Episodes ......................................................................................................................... 37 Table 6 . Sensitivity Analysis o f Changes in Simulation Parameters on the Public Pension Deficit
(Percentage o f GDP) ...................................................................................................... 48 Table 7 . Fiscal Costs o f Alternative Poverty-Prevention, Non-Contributory Pension Programs .. 50 Table 8 . Portfolio Allocations in Mandatory Commercial Second Pillars Pension Plans in Latin
America and Eastern Europe ......................................................................................... 57 Table 9 . Fund Management and Insurance Fees in Latin America’s
Commercial Second Pillars, June 2004 ......................................................................... 59 Table 10 . Minimum Retirement Ages and L i f e Expectancy for Men and Women. Selected
Latin American and OECD Countries. circa 2000 ........................................................ 71
Figures Figure 1 . Changes in the Share o f the Elderly Receiving Social Security Benefits ........................ 1 Figure 2 . Contributors to Social Security in Argentina’s Labor Force ............................................ 2 Figure 3 . Expected Coverage o f Contributory Social Security Benefits ......................................... 5 Figure 4 . Trend in Income Inequality among the Elderly .............................................................. 12 Figure 5 . Population Ageing in Argentina and Other Latin American Countries ......................... 14 Figure 6 . Poverty among the Elderly vs . Total Population in Argentina ....................................... 22 Figure 7 . Per Capita Income and the Share o f the Elderly Receiving Benefits, Selected Latin
American Countries, 2000 - 2002 .............................................................................. 24 Figure 8 . Public Spending on Social Security and the Share o f the Elderly Receiving Benefits,
Selected Latin American Countries, 2000 - 2002 ...................................................... 24 Figure 9 . Share o f the Elderly Receiving Benefits among ETEEP Respondents .......................... 27 Figure 10 . Age at Which Benefits were Awarded, Reported by Covered Men and Women ....... 30 Figure 1 1 . Reason for Receiving Benefits, Reported by Recipients o f Old Age and Survivor
Benefits, 2003 ............................................................................................................ 30 Figure 12 . Reported Reasons for Not Receiving Benefits ............................................................. 31 Figure 13 . Principal Reasons for Failing to Contribute to Social Security, Reported by ETEEP
Respondents ............................................................................................................... 33 Figure 14 . Reporting and Contribution Behavior, by Sex o f Respondent ..................................... 35 Figure 15 . Labor Market Participation o f Poor and Non-Poor Elderly ......................................... 38 Figure 16a.Percentage o f Active Respondents in each Decile o f Predicted Earnings ................... 40 Figure 16.b.Percentage o f all Active Respondents in Deciles o f Predicted Earnings .............. 40 Figure 17 . Fiscal Costs o f Full Coverage: Current SIJyP & Complementary Benefits
(Percentage o f GDP) .................................................................................................. 47 Figure 18. Argentina’s National Non-Contributory Pension Program .......................................... 52 Figure 19 . Reported Pension Income as a Multiple o f the Poverty Line., ..................................... 62 Figure 20 . Changes in Selected Indices and Public Pensions, 2001 - 2004 .................................. 63 Figure 21 . Reported Retirement Age and Average Benefit Amount o f ETEEP Retirees, by
Pension Plan ............................................................................................................... 64 Figure 22 . Second-Pillar Choices o f New Affiliates to the SIJyP, 1994 - 2004 ........................... 69 Figure 23 . Distribution o f SIJyP Affiliates between Public and Commercial Second Pillar,
by Age Cohort, 2004 .................................................................................................. 70
V
Text Boxes Box 1 . Defining the Coverage Problem: What i s it and Why do we Care? ..................................... 3 Box 2. The Comprehensive Insurance Framework ............................................................................ 15 Box 3 . Surveys of the Elderly in Argentina and Other Middle Income Countries ........................ 28 Box 4 . The Cuotu Social in Mexico Commercial Second Pillar ................................................... 44 Box 5 . Costing Current Proposals for Full Coverage .................................................................... 46 Box 6 . Benefit Adjustment Policies Around the World ................................................................ 65 Box 7 . Fiscal Federalism, Public Finance and Social Security ...................................................... 68 Box 8 . The Barr-Diamond Mortality Adjusted Retirement Age ................................................... 73
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Acknowledgements
T h i s report i s part o f the World Bank’s analytical and advisory program with the Government o f Argentina. The report was prepared by a team led by Truman Packard (Senior Economist, Social Protection Unit in the Human Development Department o f the Lat in America and Caribbean Regional Office-LCSHD). The team consisted o f Paula Giovagnoli, Evelina Bertranou (JPA Economists, Human Development Sector for Argentina, Chile, Paraguay and Uruguay) and Leonard0 Lucchetti (JPA Economist, Social Protection Unit-LCSHD). The consultants working with the team were Marcelo A16s, Rau l Oromi, Abigail Barr, Armando Barrientos, Carlos Grushka, and Marcelo Muiii6s. Rafael Rofman (Senior Economist, Social Protection Unit- LCSHD) initiated the survey o f the elderly on which many o f the findings in this report are based, provided critical inputs to the report, and was instrumental in maintaining the Bank’s dialogue with authorities from Buenos Aires. The survey firm T N S Gallup Argentina assisted in the design o f the survey and collected the data. Invaluable research and administrative assistance was provided by Tania Gomez, Febe Mackey, M a r t h a P.Vargas, and Natalia Moncada (LCSHD). Truman Packard and Evelina Bertranou were the main authors.
The Bank’s team worked under the overall guidance o f Axel van Trotsenburg (Country Director for Argentina, Chile, Paraguay and Uruguay), Evangeline Javier (Sector Director -LCSHD), Jesko Hentschel (Country Sector Leader for Argentina, Chile, Paraguay and Uruguay-LCSHD), Helena Ribe (Sector Manager for Social Protection- LCSHD), and Ariel Fiszbein (Advisor, DECRG).
The report benefited immensely from the active contributions, suggestions and comments o f reviewers. The peer reviewers inside the Bank appointed for this task were Anita Schwarz (Lead Economist, Human Development for Europe and Central Asia Region (ECSCHD), Rafael Rofman (LCSHD). Carmelo Mesa-Lago (Emeritus Professor o f Economics and Social Security, University o f Pittsburg), and Albert0 R. Musalem (Chief Economist, Centre for Financial Stability, CEF) acted as external reviewers. Each o f the reviewers provided detailed comments that significantly increased the quality and value o f th i s report. The report team is grateful for their advice and direction.
The Bank would l ike to thank the Ministry o f Labor, Employment, and Social Security (MTEySS) and many o f i t s staff for the information, many useful discussions and collaboration in the preparation o f the report by the Bank team. However, the conclusions and assertions made in this report do not necessarily represent their views and are solely the responsibility o f the World Bank report team.
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Terminology Used in this Report
This report categorizes the components o f Argentina’s national social security system for old-age income support-sometimes referred to as “pillars” as in Averting the Old Age Crisis (World Bank, 1994), and sometimes as “tiers” as in The Economics of the Welfare State (Barr, 2004)-by their objective. T h i s is in contrast to other publications that categorize the branches o f a pension system by who administers them (the public or private sector); how benefits are structured (final-salary defined benefit formula, or defined contributions); or their financing mechanism (pay-as-you-go or full funding).
Thus, the report uses the term “jkstpil lar” or “pillar one” to refer to the part o f a pension system intended to keep the elderly out o f poverty; “second pillar” to that part intended to help individuals smooth consumption over their life-cycle to prevent a dramatic fal l in income at the time o f retirement; “thirdpillar” to the financial instruments available on a voluntary basis for workers to increase their income in o ld age; and ‘tfourth pillar” in reference to non-financial elements o f welfare in old age, such as health care, housing and family support (Holzmann and Hinz, 2005).
Further, the report addresses an emerging distinction between “contributory” and “non- contributory” benefits. In some circles, the latter have come to be called “zero pillar” pensions, to distinguish them f iom minimum benefit guarantees conditioned on a history o f payroll contributions.
... V l l l
Introduction, Structure, and Main Findings of this Report
I. Expanding coverage - Argentina’s key challenge in old age income security
1. The share o f Argentina’s elderly that receive social security benefits is falling. In 1992, about 80 percent o f the elderly population was receiving o ld age and survivor pensions. However, by 2004 the portion o f covered elderly had fallen to 68 percent. Although s t i l l high relative to other countries in Lat in America, Argentina’s contraction in coverage over the past decade has been more persistent and accelerated than changes in coverage among its immediate neighbors in the region. Whereas coverage o f the elderly in Argentina contracted by almost fifteen percent from 1992 to 2004, the share o f elderly receiving benefits in Chile fe l l by only f ive percent during roughly the same period (from 1992 to 2003), in Uruguay the fal l in coverage was barely two percent (from 1995 to 2004), while in Brazi l the share o f elderly receiving benefits actually rose by over 7 percent (1992 to 2002). Furthermore, poorer households have borne the brunt o f Argentina’s coverage contraction. The share o f the elderly receiving benefits fe l l by 30 percent in the poorest quintile o f the income distribution, by six percent in the second quintile, and by eight percent in the third quintile (see Figure 1, showing beneficiaries among the elderly, and the yearly percentage change in coverage by income groups).
Figure 1. Changes in the Share of the Elderly Receiving Social Security Benefits
m Q 1 -Q2 Q4 I Q5 -Beneficiaries Armng the Ederiy (%) - right-hand scale
10 -
8 -
-- 80
-- 70 I
-- 60
50
40
30
20
-4 10
-6 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
ource: R o h a n and Lucchetti (2006) based on successive waves o f the EPH.
2. Without sustainable changes to Argentina’s social protection system, the current trend is l ikely to persist. The most reliable indicator o f the portion o f the elderly who wil l receive benefits in the future is the share o f the labor force that i s contributing to retirement security plans today (see B o x 1). T h i s share has also fallen. According to
survey data for urban salaried workers, in 1992 about 47 percent o f the labor force contributed to a pension plan.' By 2004 the share o f contributors had fallen to 35 percent. As with the fal l in coverage outcomes, this overall contraction in participating workers o f roughly 25 percent has been sharpest among lower income households. Participation among workers from households in the poorest quintile o f the income distribution fel l by 96 percent, in the second quintile by 72 percent, and in the third quintile by 20 percent (see Figure 2, showing contributors to social security in Argentina's labor force, and yearly percentage change in contributors by income groups).
20
* 10 - o c
4 3 .- E t U E n e * o 5 8 h e -10- 5 2 'E 0
s o 0 -
1 ii -20-
g E z g
U $;
Q -30 -
o s -40 -
5 4 -50 - = o e =
I 50
1 -60 ' L O
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Rohan and Lucchetti (2006) based on successive waves o f the EPH.
3. Among Argentina's population there have been two principal drivers o f the downward trend in participation. First, the repeated financial crises and economic recessions the country suffered in the latter ha l f o f the 199Os, which led to an unprecedented downturn in 2001 and a debt default in early 2002. Second, institutional factors that encouraged the growth o f unregulated forms o f employment as the economy recovered from each o f these episodes (although recovery since 2003 has been accompanied by a notable increase in the share o f workers who contribute).
Data from the Permanent Household Survey cannot be used to show whether self-employed workers contribute to the pension system. Since the level o f compliance observed in registers i s very low, this data assumes that coverage for that group i s negligible.
2
Box 1. Defining the Coverage Problem: What i s it and why do we Care?
At the turn o f the twenty-first century, fewer than 15 percent o f the world’s 6 bil l ion people had access to a formal system o f retirement income support (Holzmann, Packard and Cuesta, 2000). The majority o f th is population that goes without formal cover lives and works in developing countries. To the extent that households in these countries can s t i l l rely on traditional arrangements to provide income security in old age, there may be l i t t le cause for worry. However, with the rapid aging o f populations, urbanization and economic development, many Governments are increasingly concerned that the elderly will have reduced access to traditional safety nets. Thus, extending the coverage o f social insurance has become a policy priority. Retirement pensions are typically the largest component o f the set o f public interventions that make up a social insurance system. Low coverage o f the formal old-age pensions system, therefore, usually mirrors low coverage o f other forms o f social insurance such as income support during unemployment, disability, access to family allowances, and in many cases health care.
L o w coverage o f social insurance presents several problems. First and foremost i s the problem for the individual and by extension the household. Workers who do not contribute to formal social insurance, either by choice or because o f market or institutional barriers, are not accumulating rights toward the receipt o f benefits should they become unemployed, disabled, or when they loose their ability to work in old age. Nor are their dependents covered should they suffer an untimely death. Household members may find it difficult to cope with losses due to these risks, and can be forced into poverty should the losses from an adverse shock be great.
Second i s the problem for society. An individual’s failure to save or insure imposes an externality. If he chooses to make no provisions for the risks to income, the costs o f his decision fall on others. In countries where a significant number fail to insure, governments face a “Samaritan’s dilemma”, in that politicians cannot credibly refuse to come to the aid o f a large number o f people who suffer a loss, and the burden o f these losses can rapidly mount on current and future tax payers.
Finally, l ow coverage poses a problem for the social insurance institutions themselves. Low coverage can weaken a traditional, PAYGO pension system if not enough active workers and employers contribute to finance the benefits o f the inactive retired, disabled or unemployed. If a substantial share o f the population i s not contributing, the system cannot efficiently pool r isks and can quickly become financially unviable. Similarly, where social insurance includes individual retirement accounts, the savings that can arise from scale in fund-management are difficult to obtain when a large number o f workers do not participate, implying persistently high administration costs that eat into the savings o f those that do.
The growing “informal”, unregulated sector in many developing countries i s important to the analysis o f coverage to the extent that informal employment opportunities l i f t the constraint on choices by allowing individuals to avoid Government mandates to pool r isks or save in the formal retirement security system.
“Coverage” can be defined as both as a “stock” and a “flow” concept. The “stock” o f the population that i s covered includes al l those o f retirement age and older who are receiving a formal retirement pension. The “flow” refers to those individuals o f working age who are members o f the workforce and are currently accumulating rights toward a retirement pension, either by contributing under the parameters o f a PAYGO benefit formula, or by regularly depositing savings into a private individual retirement account. Thus, the “coverage gap” also has stock and f low dimensions. The stock consists o f the current mass o f elderly (most worryingly the elderly poor and those living close to the poverty line), wi th no formal income protection. The f low consists o f the l ikely stream o f current active workers that would fall into the former category year after year.
Source: Barr (2004 and 2000), Gill, Packard and Yermo (2004) and Rofman (2005).
4. In recent years, a worker’s history o f contributions has become increasingly important to determining whether they and their dependents wil l eventually receive benefits. Contribution requirements are not new. Argentina’s principal social security institutions have always been “contributory”, where at least by design the main sources o f
revenue are mandatory premiums paid by employers and workers which are collected as pay-roll taxes. However, as part o f a package o f parametric and structural reforms passed in October 1993 to contain a growing trend in spending, contribution and other eligibility requirements were not only raised but more strictly enforced.
5. The reforms passed in 1993 were aimed at halting an acute financial crisis in the social security system. Quite apart f rom the strain created by demographic changes, the retirement age, benefit, and contribution parameters o f the system had been set with little regard for actuarial balance; certain groups had enjoyed special exemptions from full contribution requirements and had won more generous treatment under the system; and a sizeable portion o f benefits had been awarded discretionally for years. Each o f these factors, and several others, had endangered the long-term financial viabi l i ty o f the system. In the decade prior to the 1993 reform, the annual cash deficits between benefit payments and contribution revenue had grown rapidly. Transfers f rom general revenue had been used to make up the shortfall. In the mid and late 1 9 8 0 ~ ~ approximately 25 percent o f annual spending on pensions had been financed with transfers from the national treasury. But despite the injection o f subsidies, deficits in the social security system had grown to be unsustainable. The Government’s inability to honor i t s obligations spawned a rash o f legal action which led to the declaration o f a “state o f emergency” during which payment o f settlements were suspended. The pension deficit at the national level, along with the financial short-falls o f separate pension plans for provincial c iv i l servants, had grown to 3 percent o f GDP by 1993 (Rofman, 2003; MTEySS, 2005).
6. The changes in parameters and benefit cuts introduced with the 1993 reform put Argentina’s social security system o n a more financially sustainable path. Long-term projections o f the cash deficit .show that from 2000 when the deficit stood at a l i t t le under 3 percent o f GDP, future deficits were expected to fal l steadily to 0.9 percent by 2025 as a result o f reforms (Grushka, 2000).
7. The reforms passed in 1993-in particular the new tougher contribution requirements, the higher retirement age, and less generous benefit formula-averted what would have been a much eater long-term financial crisis in the social security system had they not been passed. Of course, financial forecasts o f the long term savings from the 1993 reform have to be interpreted with caution, and even the most comprehensive estimates would not have completely captured many o f the changes to the system that have been made during and since the 2001-2002 crisis. But as a whole, the cautious long term financial outlook for Argentina’s national pension system i s better, although spending on social security at the national level s t i l l makes up roughly 29 percent o f total spending by the national government and only 30 to 35 percent o f this spending i s financed from worker and employer contributions (MTEySS, 2005).
F
8. This said, the 1993 reforms introduced a tradeoff between greater fiscal solvency and the share o f elderly receiving benefits, at least for a very long period o f transition.
* Estimates o f the growth in public pension liabilities had the reform not taken place, indicate that pension expenditure would have grown by about 3 percent a year requiring an additional annual injection o f 1 percent o f GDP for the Government to cover these liabilities (Rofman, 2003).
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9.
Most projections clearly show this trade-off, with the system’s contribution revenue and benefit payments expected to balance by the year 2030, as the share o f elderly receiving contributory pensions falls below 45 percent by 2025 (Rofman et al, 1997; Gmshka, 2001 and 2002; MTEySS, 2005).
Figure 3. Expected Coverage of Contributory Social Security Benefits
100%
ae v v) c, 5 90%
d
e
E
i? 8 80%
U e 0
cn e >
70% .- .- P p! 60%
5 E Q) 50% 5
%
w
rc 0
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Source: MTEySS (2005).
However, the trade-off introduced between expected fiscal solvency and the breadth o f coverage is deceptive. The simulated expectations o f long-term financial sustainability do not capture the l ikely repercussions o f Argentina’s other social security crisis-namely the pressure that will be created to alter a national retirement security system that in 10 years i s expected to cover less than ha l f o f the elderly and which wil l be “national” in name only.
11. Purpose and Structure of this Report
10. T h i s report focuses o n the reach o f Argentina’s pension system today and in the future - the l o w coverage o f the system that has not been addressed by the 1990s reforms. It examines and discusses pol icy options that can help solve the problem o f l ow coverage directly-such as improved deployment o f social assistance transfers to the elderly, and a more proportional link between workers’ contributions and public pension benefits-and options that could help improve the reach o f the system indirectly-such as improvements to social security, private pensions and related institutions that might lower the perceived costs o f compliance with the mandate to contribute, restore credibility, and
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thus provide employers and households with improved incentives to participate in the system.
11. Much has already been written about Argentina’s old-age income security institutions and reformed pension system in recent years (see MTEySS, 2003 and 2005, ILO, 2003a, 2003b and 2006, Rofman, 2003). The abundance o f recent analytical work on the state o f social security and pension institutions has been motivated by the economic and social crisis o f 2001-2002, but also by concerns for the viability o f these institutions long before the crisis. For this reason, this report gives special emphasis to individual and household decisions, and the outcomes o f these decisions given the current set o f social security institutions. Several sources o f information are exploited, including administrative data, Argentina’s regularly deployed labor and household surveys, and a special survey o f the elderly designed and deployed by the World Bank for this report, the Encuesta a la Tercera Edad sobre Estrategias Previsionales (ETEEP), which was conducted in late 2003.
12. I t i s important, from the outset, for readers to note that none o f these sources o f data can be used to paint a complete picture o f the role social security and private pensions play in securing household welfare. Argentina st i l l lacks a fully representative survey sample frame that captures both urban and rural areas and collects compliance information for the self-employed. Thus the coverage and contribution indicators presented earlier (in Figures 1 and 2) which were drawn from Argentina’s urban sample frame, are l ikely to over-estimate coverage. The ETEEP survey uses the same sample frame o f urban areas covered by Argentina’s Permanent Household Survey (EPH) and Living Conditions Survey (ECV). For this reason, the analysis reflected in this report suffers f rom an urban bias that i s common to much o f household-level empirical work in Argentina, and should be interpreted with this bias in mind.
13. Two additional caveats about the ETEEP have to be disclosed up front. The first i s with regard to the timing o f the survey. Interviews were conducted in late 2003 as Argentina was just beginning to recover from the crisis-this is likely to have affected the behavior and outlook o f respondents significantly. The second i s the l imited extent to which lessons can be drawn from behavior reported by the elderly today to guide pol icy for income security o f the elderly in the future. Social security institutions and Argentina’s labor market have undergone profound structural changes in the last two decades that have to be kept in mind when considering the implications o f the results.
14. T h i s pol icy report summarizes the findings o f four pieces o f background analysis that exploit the new survey data (all available online at www.bancomundial.org.ar, along with details about the ETEEP and the database); highlights the problems and challenges faced by pol icy makers in striking a balance between the objective o f extending coverage and that o f maintaining fiscal stability; and presents some o f the issues and options that could be considered in a national dialogue on the future o f the social security system.
15. This report does not provide specific suggestions o f what Argentina needs to reform and how. The report is intended as a contribution to the public debate. However, the f i n d i n g s 4 r a w n from a review o f recent pol icy and academic literature; interviews
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with stakeholders in and outside o f the government; analysis o f existing sources o f data; as wel l as from a special survey o f the elderly-motivate a discussion o f some o f the principal challenges for Argentina’s current social security and private pension institutions.
16. The report i s structured in f ive parts that fol low this introduction and summary o f main findings. Part I presents a conceptual framework for decision makers charged with crafting policies for o ld age income security, and describes the evolution and structure o f Argentina’s pension institutions. Part I 1 presents the findings o f the household empirical analysis using existing surveys and the new data f rom the ETEEP, including the importance o f pensions to household income and poverty, the micro- determinants o f coverage, and the viability o f other income security strategies for the most vulnerable. Part I11 focuses solely on policies and programs designed to ensure minimum income and cover poverty in old age, presenting estimates o f the fiscal cost o f proposals made by the principal actors and stake-holders in the pension reform debate. Part IV examines the main pension pol icy issues in this debate and places these issues in international context. Part V presents some options for the Government and stake- holders to consider as Argentina enters a more detailed and deliberate phase o f defining pension reform.
111. Summary of Main Findings
17. summarized in the remainder o f this section.
T h e main findings and recommendations made in the final part o f this report are
18. Strengthening poverty-prevention pensions i s important, but i s just one item on the larger reform agenda. Overall, while improvements in the deployment o f non- contributory, social assistance pensions and a greater proportionality in the eligibility requirements for minimum contributory pensions are important policies for Argentina to improve pension coverage, they are just one i tem o f a much broader reform agenda. Considered singularly and with no other changes to the system, these policies could be fiscally costly, could displace forms o f social protection targeted to other age groups, and undermine the projected long-term fiscal sustainability gained from the 1993 reform. The fiscal analysis conducted by A16s and Muii ios (2006) for this report, shows that increasing the coverage o f poverty-prevention pensions could cost Argentina up to 0.8 percentage points o f GDP and that as a portion o f GDP these costs could decline over time. The report intentionally reports on a conservative, high-cost scenario - not as an endorsement o f any specific set o f proposed measures, but to act as a base l ine estimate and to motivate a closer consideration and more exact costing o f options. The l ikely cost o f non-contributory benefits and proportional contributory benefits wil l o f course vary depending on a wide range o f specific design features. For example, targeting non- contributory pensions only to the elderly poor with no other source o f revenue could lower fiscal costs to 0.5 percent o f GDP. Further measures, such as raising the age at which non-contributory pensions are available can lower these cost further. But the real key to making new poverty prevention pensions fiscally sustainable in the long-run i s to increase participation in the earnings-related pension pillars.
7
19. The lack of credibility of formal institutions may be one factor for low participation rates in social security. The current participation rate in contributory, earnings related plans i s too low, and if the current share o f the work-force that contributes does not increase, the cost estimates o f non-contributory and proportional minimum contributory benefits quickly increase. A large portion o f the analytical work conducted using the ETEEP seeks to answer whether the l o w level o f participation among workers in Argentina i s a reflection o f social exclusion or household choice. Although far from conclusive, the evidence presented here suggests that exclusion i s a relatively more important determinant o f l ow levels o f participation, and that employers are playing a critical “gate keeping” role. But also apparent in the results i s that the labor market only offers a viable alternative to the pension system for those who have always had and continue to enjoy good labor prospects. Revealingly, those who continue to work in old age are individuals who report the longest employment histories. Furthermore, the working elderly in the ETEEP are not only those whose predicted labor incomes are relatively high, but also those who have contributed to the pension system for fewer years throughout their working lives (than those who are inactive and receiving benefits). However, whether exclusion i s more important than household choice in determining participation, incentives are s t i l l l ikely to matter: the incentives employers have to offer formal contracts to their workers, and the incentives workers have to rely on the pension system as an important tool for securing income and welfare in old age. Employers wi l l find it easier to play a gate keeping role if the social security system i s lacking in credibility and workers do not value the coverage it offers.
20. The lack of a credible, systematic, predictable adjustment rule for pension benefits creates a vacuum. As in the mid 1980s, this vacuum has been f i l led with numerous lawsuits brought by beneficiaries, which have made Argentina a country with one o f the highest levels o f legal action related to pensions. Argentina’s National Constitution presents constraints on the options that the National Government has in formulating an adjustment rule. However, there are examples o f indexing policies from other countries that would allow the Government to do much more even within these constraints. A credible and predictable adjustment pol icy couid help restore the credibility o f public pension benefits in the eyes o f prospective contributors.
21. The commercial branch of the pension system would need to be given a fair chance as, at current rates, it will provide inadequate benefits. The contribution rate i s a pol icy variable that the Government has not restored to the values intended by the architects o f the SIJyP. Further, the high concentration o f pension hnd portfolios in public fixed-income securities comes at a high opportunity cost in forgone investment in the wider economy and could expose workers’ retirement savings to political risks. For this reason, diversification o f AFJP holdings could be important not only to the economic and financial performance o f the commercial second pillar, but also for its sustainability. Regulatory, industrial and political factors have raised and kept the cost o f insurance too high. Problems with second-pillar insurance l ie in Argentina’s high benefit expectations; generous eligibility requirements; regulation o f reserve requirements; rules that index insured capital to share value; structures for determining eligibility and processing benefits; the way AFJP portfolios are valued; and a market structure that has resulted in a close relationship between the fund managers and insurance providers that hinders
8
healthy competition. Examples o f public provision o f insurance are not encouraging. But in order for private provision to once again be viable, specific changes would have to be underpinned by consumer protection mechanisms; clearer rules on what and how information i s disclosed by insurance companies; the development o f risk-focused supervision; and enhanced corporate governance standards.
22. The lack of a credible, systematic, predictable adjustment rule for pension benefits creates a vacuum. As in the mid 1980s, this vacuum has been f i l led with numerous lawsuits brought by beneficiaries, which have made Argentina a country with one o f the highest levels o f legal action related to pensions. Argentina’s National Constitution presents constraints on the options that the National Government has in formulating an adjustment rule. However, there are examples o f indexing policies from other countries that would allow the Government to do much more even within these constraints. A credible and predictable adjustment pol icy could help restore the credibility o f public pension benefits in the eyes o f prospective contributors.
23. The multiplicity of pension plans i s a source of inequity, undermines fiscal stability, and hurts the efficiency of policies at the national level. There are important disparities between the pension parameters o f the SIJyP, and the public pension plans for provincial and municipal c iv i l servants that remain separate from the system, as wel l as special regimes for other select groups (members o f the legislature, judges, the mil i tary and others). The multiplicity o f substitutive pension plans has a negative impact on equity and efficiency, and poses a r isk to long-term fiscal sustainability. Recent efforts to restore plans that were integrated with the SIJyP pose a risk to equity and fiscal sustainability as well. Further, the fact that the professional pension plans are not subject to government regulation or non-government independent scrutiny, yet benefit from government mandates which could entail implici t guarantees, i s a risk that remains largely un-quantified.
24. The remaining choice between the public and commercially administered branches of the SIJyP second pillar poses several problems but to the extent that affiliates to the public branch are fewer and older, these problems are relatively minor and could disappear in time. The continued existence o f a public, defined- benefit, earnings-related pension plan, leaves open the option o f return which could be appealing in the short-run but would need to be assessed carefully. In the past four years, calls to allow AFJP affiliates to return to the public branch o f the second pillar have become widespread. In countries where a periodic choice to switch has been offered, i t often has led to uncertainty in calculating public pension liabilities and to strategic behavior, that raises the cost for the public system. For the sake o f long-term stability and credibility o f the system, there might be benefits in addressing legitimate grievances that may exist among SIJyP affiliates who found themselves affiliated to the commercial branch o f the second pi l lar against there will. But the fiscal-cost implications o f any offer to choose again between the public and commercial branches would need to be carefully evaluated, especially if going beyond a one-off, conclusive, and time-bound offer.
25. Ageing will again threaten fiscal sustainability; however, there i s an opportunity to mitigate this risk early on. L i fe expectancy at birth has increased by
9
more than 10 years since the middle o f the twentieth century. Argentina can expect further population ageing, albeit at a less accelerated rate than in recent decades which wil l eventually raise demographic risks faced by the pension system yet again. Whi le a demographic bonus i s expected in the form o f a temporary and l imited increase in the share o f population aged 15 to 64, pol icy makers might want to take advantage o f this demographic window o f opportunity. In the medium term, policymakers may need to either equalize retirement ages for men and women, raise the retirement ages, and probably both.
26. There i s no policy rationale for the gruciuble pensions granted by members of Congress, and expansion of targeted non-contributory pensions could be financed with expenditures currently used for the graciable pensions. With respect to existing non-contributory pension programs, the current PNC program i s critically important, and o n the whole, the elements o f the program that are designed to be targeted to the poor perform reasonably well. However, the graciable pensions granted by members o f Congress are an exception. Although these sort o f discretionary benefit programs exist in other countries, they rarely are as large as the program in Argentina. If further measures to raise or expand targeted non-contributory benefits are considered, they could be accompanied with the stepwise reduction o f the graciables. This would make more fiscal space for non-contributory benefits that are targeted according to clear poverty criteria, and strengthen the credibility o f the PNC program as a whole.
27. Since Argentina introduced full statutory coverage of poverty-prevention pensions, an evaluation of how the government implements this program would be important. Argentina has already taken a big step towards eliminating the risk o f poverty in old age. When it l i f ted the ration on targeted social assistance pensions in 2003, Argentina fundamentally changed the nature o f at least the targeted benefits in the PNC program, creating a form o f coverage that i s closer to a right than a standard social program. From the moment this decision was taken, at least in theory and with respect to the risk o f poverty in old age, Argentina introduced full statutory coverage. In terms o f preventing poverty in old age, whatever coverage gap s t i l l exists between the poor and non-poor elderly since 2004 reflects implementation or take-up problems. Clarifying how the PNC are targeted and providing public information on coverage expansion would be important to reduce the current l ow levels o f coverage. The shift from a mere social assistance program to a universal right to protection against poverty in old age raises the question o f where best to ‘house’ the PNC institutionally in order to improve implementation and attain optimal impact, given the incentive structure o f eligibility and benefit parameters in the broader social security system.
28. With full coverage against the risk of poverty in old age, the Government could reconsider the role of other minimum-pension structures. A remaining pol icy question i s whether Argentina needs to retain a state-subsidized, minimum contributory benefit with an un-rationed social assistance benefit targeted to the elderly in place. A subsidized contributory benefit-r matching contribution scheme-may indeed s t i l l be useful, not as a guarantor o f minimum old age income, but as a device for improving incentives to participate among lower-income workers. However, any such incentive instrument would need to be followed closely, for if i t were not to lead to increased
10
participation, it could result in perverse regressive transfers f rom uncovered to covered households.
IV. Looking Ahead
29. Looking beyond these important areas that are in need o f improvement in the medium term, there are fundamental, long-term issues and questions that would need to be answered before a clear understanding and consensus on the social contract can be achieved. For generations, the expectation held by Argentineans o f a “decent pension” was about 80 percent o f a relevant multiple o f earnings in the years leading up to retirement. T h i s expectation did not change with the 1993 reforms, but the institutions did change and were no longer designed to meet these expectations. With respect to income security in o ld age, what have Argentine households come to expect from the State since the 1993 reforms? Even after the fundamental re-distribution o f risk brought about by these reforms, have household expectations been altered? What are the r ights households are entitled to, if they meet the responsibility to comply with the mandate to participate? To be covered against the risk o f poverty in old age, or something more? I f households expect more from the State than just to prevent poverty in old age, manage the r isk o f inflation, and regulate financial risks, can that expectation be made more explicit? When Argentineans call for the State to take a role in helping to smooth consumption from o ld age through a mandatory, earnings-related system, what do they expect (measured in average replacement rates) f rom their compliance with the mandate?
30. Whatever the particular reform model that i s put in place to address medium term challenges o f the current system, it i s important that i t be implemented and guided by a central pol icy making body with undisputed authority over the system and a clear idea o f the long-term objective. The need for a strong, centralized institution to guide pol icy has been particularly apparent in the years since Argentina’s 2001/2002 crisis. For the past years, the first and foremost challenge o f national pension pol icy has been to extend coverage and thus improve the equity, efficacy and efficiency o f the national old-age income security system. Yet despite numerous decrees, regulatory changes and legislative measures initiated by various stakeholders since 2001, the coverage problem remains first and foremost. And the inequitable impact o f the pension system has grown worse (see Figure 4).
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Figure 4. Trend in Income Inequality among the Elderly with and without Pensions
(Gini Coefficients among Specific Population Groups, 1992 - 2004)
0.65
0.60
0 0.55 0
0 0 0.50
0 0
0.45 a 0 5 1
0.40 m e * c 3 *
a * 0.35 * 0.30
0 . .*. . . .
0.25
0.20 92 93 94 95 96 97 98 99 00 01 02 03 03-11 04-1
Receiving Wnsions (all) Receiving bnsions & Older than 65
0 Fupulation Older than 65, Receiving and Not Receiving Pensions
Source: CEDLAS using EPH 2004, second semester.
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Part I. A Framework to Guide Pension Policy and Analyze How Argentina Covers the Losses from Ageing
31. Social insurance i s intended to be an instrument (or more precisely a package o f instruments) made available by government to help households manage the risks to their consumption posed by a wide array o f contingencies. Because it i s designed to cover the losses that private insurance cannot cover-and to augment private coverage where this fails or falls short-social insurance instruments are not expected to strictly conform to the actuarial rules that govern the market for risk. This said, policy-relevant insights on the nature o f a particular loss, how it could best be covered, and the degree to which the private sector should be expected to help, can be drawn from the classical economic insurance models o n which these rules are based.
La. The Prospective Losses from Ageing and Objectives of Pension Policy
32. H o w pol icy makers approach population ageing presents a case in point. “Old age” i s not a bad state, per se. In most societies, long l i fe is considered a blessing, and even a goal o f development. However, from an individual’s perspective, ageing i s also accompanied by at least three distinct (although related) prospective losses: the loss of earnings ability, as the body and even the mind succumb to natural deterioration over time and an individual i s no longer able to count on his labor as a source o f income; unanticipated longevity that increases the period o f l i fe when an individual has to consume but cannot earn income from his work; and derived from these, the prospect o f poverty in old age.
33. Covering these losses lies at the core o f broadly accepted objectives o f pensions policy, which are (i) to prevent a dramatic fal l in household means when income from labor i s no longer an option-the “consumption smoothing” objective; (ii) to ensure that these means are at least o f a level adequate to sustain individuals’ needs for the remainder o f their life-the “income adequacy” objective; and (iii) to ensure that household consumption wil l never fall below an absolute minimum, socially-acceptable level-the “poverty prevention” objective. Principles drawn from the classical insurance model can help guide policy-makers o n how best to pursue these objectives and cover the three prospective losses from ageing.
34. As a population ages and average l i fe expectancy improves, the first prospective loss becomes increasingly predictable. That is, a greater share o f the population i s l ikely to reach old age, typically marked by a threshold set at 60 or 65.3 The f i rs t national social insurance plan ever established in Germany in 1889 set a similar threshold when average l i fe expectancy for men was only 45.4 At the time, the probability o f reaching old age
Population ageing i s actually an outcome o f several forces, including people l iving longer and having fewer children. The logic presented here places greater emphasis on the former, but i s not invalidated by the latter: the outcome o f both demographic forces i s an increasing share o f older people in the population. From an individual’s perspective, this should make the prospective loss o f earning ability from ageing more predictable, while from a policy-maker’s perspective i t becomes more systemic.
When Otto von Bismarck proposed the creation o f the system in 1881, the intended retirement age was 70. This was then lowered in the political negotiations prior to establishment o f the system.
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and incurring this loss was very low. L ike other forms o f insurance, this system, and those that were established later in other countries, was based on a risk-pooling model that defined the benefits which would be received by the relatively few that reached old- age.
1 8 - .a
8 1 7 -
1 1 6 -
t3 9 3 1 5 -
14 -
13 1
35. But as with other prospective losses, as old-age becomes more frequent i t i s increasingly dif f icult to cover with a risk-pooling, defined-benefit model. This is becoming more apparent across the OECD and in developing countries, where governments are concerned with rapidly growing public pension liabilities. Thus with increasing longevity (see Figure 5) and a greater share o f elderly in the population, i t i s reasonable to expect individuals to shoulder. a greater share o f this burden, and to rely more on individual savings to smooth consumption between working l i fe and old age (see Box 2).
Figure 5. Population Ageing in Argentina and Other Latin American Countries (Projected change in l i f e expectancy o f average male at age 65)
19
Source: CELADE (2004). Boletin Demografico, numero 74. Santiago, Chile
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Box 2. The Comprehensive Insurance Framework
Individuals and societies can respond in a variety o f ways when faced with the prospect o f economic losses from shocks l i ke natural disasters, sickness, sudden death, disability and unemployment. Social risk management i s a conceptual framework encompassing three broad categories o f responses to shocks: ex-ante prevention, mitigation, and ex-post coping (Holzmann and Jorgensen, 2000, and World Bank, 200 1). The comprehensive insurance approach offers a tool for determining which mitigation instruments and preventive measures will be most effective given the size, fiequency, and the extent o f externality o f a range o f possible economic losses (Ehrlich, and Becker, 1972, and Gill and Ilahi, 2000).’ The comprehensive insurance problem for individuals, households, or g o v m e n t s (as the risk-mitigating agent o f interest) is to determine the optimal mix o f “market insurance”, “self- insurance”, and “self-protection”. Both market- and self-insurance transfer income from “good” states to the “bad” states o f the world.
Market insurance pools risks across individuals. Where i t is available, it can be purchased at a pic+-the insurance premium which, in classic insurance, should be set according to the size o f the prospective loss and the probability o f the bad state coming about. (Conventionally, the price o f market insurance 7r i s said to be “actuarially fair“ if xi = (1 + a)p, L , where p,L i s the expected loss, Le., size o f the loss L, weighted by probability p o f the loss coming about in the bad state, and a i s a “loading” charged by the market- insurance provider to cover administrative costs and profit, as in Ehrlick and Becker, 1972, Barr, 2001).
Self-insurancs-essentially individual saving-does not involve risk pooling. Whi le i t has no explicit price, its cost can be imputed fiom the expense people incur to save, say in forgone consumption. Individuals without market or self-insurance must cope with whatever losses befall them. They can, however, mitigate risk by “self-protecting” i.e., taking preventive measures. Prevention reduces the probability that losses will occur, but does not reduce the size o f a loss should one occur. Individuals and households that are unable (or choose not) to take preventive measures or insure by saving or through risk-sharing structures, are forced to cope with the full costs o f losses in the wake o f shocks.
To reflect the growing sophistication and changes in the lexicon used in the literature we have replaced the terms originally used as follows. We refer to market-insurance as riskpooling; to “sel f insurance”, as saving; and “self protection” as prevention. Thus, risk pooling redistributes consumption opportunities toward the bad states o f the world at a price. Saving redistributes income similarly-cash balances reduce fluctuations in consumption-but does not pool risks. Prevention lowers the probability o f the bad state occumng.
According to the framework, individuals or households smooth consumption over good and bad states o f the world. Where risk pooling i s missing, the individual i s forced to smooth consumption using only savings and prevention. In a world where the option o f both risk pooling and saving exist, the individual sees these as substitutes. Risk pooling-available at or near actuarially fair prices-reduces saving. However, greater coverage o f risk pooling does not inevitably result in individuals spending less on prevention (what economists call “moral hazard”). If prevention leads to a lower likelihood that the bad state will occur, and if this i s rewarded by the market in the form o f lower premia, risk pooling and prevention can become complements-individuals can be encouraged to take up more prevention in return for cheaper risk-pooling instruments.
Figure 2.1 illustrates the prescriptions o f the comprehensive insurance framework on two axes, each representing different dimensions o f prospective losses: size (amount o f the loss) andfiequency (probability o f occurrence) o f the loss. I t i s more efficient for individuals to cope with rather than try to insure against small, rarely-occurring losses (the bottom-most, left-hand corner o f Figure 2.1). However as prospective losses become more frequent, i t i s relatively more efficient to engage in prevention and savings to mitigate (that is, to lower the probability, and cover the costs of) the loss. As a prospective loss becomes less frequent but increases in size, it i s more efficient to engage in risk pooling. For many o f these large, rare losses, households w i l l have incentives to engage in prevention to lower the probability they w i l l occur even further. However, for losses that are frequently occurring and catastrophic in size (the right-hand, upper-most comer o f Figure 2.1) there i s little that individuals, households or even markets can do on their own.
(continued on next page)
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A I I I I I I I I I I I I I
Figure 2. 1. Mitigation Instrument According to Size and Frequency of Potential Losses
F r e q u e n c y o f L o s s ( p r o b a b i l i t y o f o c c u r r e n c e )
Source: Ehrlich and Becker, (1972), Gill and Ilahi (2000) and Gill et al. (2004).
36. With respect to the second prospective loss, unanticipated longevity, within a given generation, there wil l always be some who are longer l ived than others. Even if these individuals can form reasonable expectations about their longevity based on their own health and on that o f their parents, many will still underestimate the period o f l i fe without work that they wil l need to finance. Thus, by definition, this prospective loss is relatively rare and readily insurable. Indeed the private sector in many countries provides defined-benefit, longevity insurance to households in the form o f annuity contract^.^
37. Finally, with respect to the third prospective loss, in the context o f long term economic development, as each generation’s labor market prospects and opportunities for investment and capital accumulation improve, the share o f each cohort that arrives at o ld age without the means to finance at least a minimum level o f consumption should shr ink. Somewhat less sanguinely, given the strong l i n k s between income and life-expectancy,
The sound and efficient private provision o f annuities, like other forms o f insurance and contractual savings, cannot, o f course, be taken for granted. A safe, strong and efficient insurance sector demands careful regulation in even the most sophisticated economies with the strongest institutions. This issue i s covered in greater detail in Part 111.
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there is a “non-random” attrition among the elderly that lowers the share o f elderly poor relative to the share o f poor in younger age groups (Barrientos, 2003). All else equal, poverty in o ld age should be increasingly rare and, therefore, also a loss that can efficiently be pooled (see Table 1)6. But given the social definition o f the loss, “poverty”, markets cannot be expected to respond with risk-pooling instruments, and the State often steps in to fill this gap.
Table 1. Poverty among the Elderly
Per capita income equal or greater than 50 per cent of
Equivalent income equal or greater than 50 per cent of Per capita income equal or
greater than $2 median median*
AI I 60+ 65+ All 60+ 65+ All 60+ 65+ Argentina 16.6 5.3 4.5 20.7 6.4 9.5 8.5 5.2 18.6 Bolivia Brazil Chile Colombia Costa Rica Dominican Rep. Ecuador El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru Uruguay
47.0 22.2
8.9 30.4 11.8 13.8 40.9 36.9 36.6 36.6 17.5 27.2 38.3 21.4 30.2 31.8 1 .I
48.0 6.3 4.4
29.9 16.8 19.8 47.3 33.7
28.9 17.5 30.2 31.8 18.1 23.3 21.9 0.1
25.0
50.2 5.4 3.8
31.2 19.1 21.8 49.4 33.6 44.7 30.3 18.2 31 .O 32.6 18.0 23.2 21.6 0.2
28.4 30.2 31.4 27.9 36.6 38.4 25.6 7.5 6.3 23.5 10.3 9.4 13.1 6.6 5.7 11.8 7.9 7.3 26.6 26.4 27.6 25.8 29.2 30.8 18.1 22.2 24.2 17.3 30.4 33.6 25.2 34.1 36.4 23.8 38.1 40.9 26.5 33.5 34.7 26.0 38.4 40.0 30.5 28.5 28.4 30.1 30.4 37.7 36.6 44.7 34.1 45.9 27.5 19.9 20.9 26.8 24.3 25.7 26.2 24.6 26.4 25.0 29.7 32.3 22.9 27.4 28.0 21.9 30.5 31.3 20.3 15.8 16.2 19.7 18.3 19.0 22.2 18.8 18.7 20.6 21.7 21.7 25.9 19.4 18.6 24.5 24.4 23.9 24.7 15.8 15.2 24.2 18.3 18.7 22.0 6.5 5.4 17.8 8.7 7.5 20.0 17.4 17.5 19.7 20.9 21.2 Venezuela 29.5 25.3 ~
Source: “Alleviating Old Age Poverty in Latin America’’ presentation given by J.J. Dethier, June 2004, Bogoth, Colombia. * Income equal or below 50 per cent o f median income using OECD equivalence scale [equal to 0,5 + 0,5 x number o f adults + 0,3 x number of children (aged 16 or less)].
Lb. Argentina’s Institutions for Old Age Income Support
38. Argentina’s social security institutions are among the oldest in Latin America. The earliest retirement pension plans offered in the country were created just over a century ago. Up to the late 1950s the social security “system” was in fact a diverse array o f heterogeneous pension plans. However, the legislation o f a uniform national benefit level with l i t t le follow-up to ensure an adequate level o f contributions, led to growing financial problems. T o address these problems, a new law was approved in the late-
Table 1 shows poverty rates among different age groups in the population for a selection o f Latin American countries. In some notable cases, the assertion that poverty among the elderly should be lower than among other age groups, i s not borne out by the data. However, these data do not capture asset wealth. Typically, although their income is lower, the elderly hold a greater share o f non-liquid assets. And with economic development, a l l else equal, the total life-time opportunities to build assets should increase, again sustaining the assertion that poverty in old age should become relatively rare.
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1960s, which consolidated most o f the previously existing funds into a national, defined benefit, pay-as-you-go (PAYGO) system covering most o f the formal labor force with three separate plans: one for c iv i l servants, another for the self employed, and a third for private sector workers. Separate pension plans offered by the national government for the military and s t i l l others run by the provincial governments for local c iv i l servants and specific professional activities continued operating along side the three principal plans with variable financial outcomes (Rofman, 2003).
39. This national social security model, which segregated coverage by sector o f employment, remained in place for more than 25 years, when growing financial difficulties again became apparent. By the early 199Os, the deficits between the benefits defined by the system and contribution revenue grew and the social security system was unable to meet its obligations. The Government consolidated the three national plans under a single social insurance institute and began to consider deeper parametric and structural changes. A package o f reforms passed in October 1993 introduced a new social security system that started operating in July 1994. The reform package raised the retirement age by five years to 65 for men and 60 for women; phased in changes to the benefit formula, contribution rates, and eligibility requirements o f defined-benefit plans that tightened the link between benefits and contributions; and introduced a new branch o f individually owned, commercially managed retirement savings accounts.
40. Today Argentina’s Government makes an array o f instruments available to help households manage the losses that arise from ageing, both directly and through regulation o f private provision. The 1993 reform established a new “integrated” national social security system, SIJyP (Sistema Integrado de Jubilaciones y Pensiones), along the lines o f the “multi-pillar” model that was shaping pension reforms elsewhere in Latin America.
41. All economically active individuals over 18 are required to participate in the national system, whether employed or self e m p l ~ y e d . ~ Since the establishment o f the SIJyP new entrants to the labor market who find jobs in Argentina’s formal sector (including regulated self employment) have chosen between individual accounts (managed by Administradoras de Fondos de Jubilaciones y Pensiones, “AFJP”), and a down-sized defined benefit plan (managed by the public Social Security Agency “ANSeS”) to finance the earnings-related portion o f their retirement pensions. The earnings-related benefit from the branch o f individual accounts, the Jubilacidn Ordinaria or “JO”, can either be received in the form o f regular withdrawals o f the affiliates’ accumulated savings or as an annuity, and in the public branch, the Prestacidn Adicional por Permanencia or “PAP”, i s paid directly by ANSeS.’ Underpinning earnings-related benefits i s a “universal” flat pension (Prestacidn Bcisica Universal, “PBU”) that sets a lower bound on the income covered workers who have contributed to the system for at
Those covered by independent, separately administered plans-discussed below-are exempted from rarticipation in the SIJyP.
The 1993 law also established clear transition arrangements. Workers that were contributing to the system prior to the 1993 reform can stay in the RRP or migrate to an AFJP. Those who stay in the RRP contribute toward a PAP, and receive a PC (Prestacidn Cornpensatoria) that recognizes rights acquired through contributions to the system prior to 1994. Those who choose to open a private AFJP account also receive a PC from the public pillar, and the JO financed from accumulated savings and returns from investment.
7
18
least 30 years can expect to earn when they retire. Workers that have at least 10 years o f contributions can claim a lower flat pension, the Prestucibn p o r Edud Avunzada or “PEA”, but not until they reach 70 years o f age.’
42. Financed and administered separately from the SIJyP, the Government offers targeted social assistance pensions-Pensiones No Contributivas or “PNC”. There i s no contribution requirement to receive the PNC, nor are benefits under this non-contributory program strictly l imited to covering losses from ageing.” The non-contributory program also pays special pensions granted at the discretion o f members o f Congress (gruciubles), as wel l as other non-contributory pensions granted by special laws to several groups other than the poor and vulnerable. l1
Lc. The Multiple Pillars of Old Age Income Security in Argentina
43. Since the 1993 reform, and with some important exceptions, the instruments that Argentina makes available to help households manage the risks to income from ageing are better aligned to cover these losses. The Government requires individuals to shoulder a greater portion o f the risk o f the increasingly predictable loss o f earnings ability, either by requiring they contribute to savings accounts managed by the financial sector, or to a restructured defined-benefit plan that tightens the link between benefits and contributions. It has developed strict rules on how these savings can be withdrawn through guidelines for “programmed withdrawals” and enforcement o f minimum annuitization requirements through privately provided insurance to cover the risk o f individuals outliving their retirement savings. I t guarantees a minimum level o f retirement income for individuals who have met minimum participation requirements in either the commercial or the public earnings-related plans, and provides a modest benefit targeted to the elderly indigent who were too poor or otherwise unable to participate in the system. In addition, the Government maintains tax incentives to encourage voluntary retirement savings, and regulates the provision o f contractual savings instruments by the financial sector.
44. In the widely accepted pensions lexicon, Argentina’s multi-pillar pension system (i) has two “first pillar” instruments, (the P B U and the PEA), as wel l as targeted social assistance pensions ( P N C F t h a t pool the risk o f poverty in old age; (ii) mandates the demand and regulates the supply o f “second pillar” savings (the JO through AFJP individual capitalization accounts) and annuities to ensure that individuals engage in and benefit from a minimum level o f consumption smoothing, while allowing the option for workers to retain a defined benefit plan for their earnings replacement (the PAP administered by ANSeS); and (iii) encourages additional, voluntary “third pillar” savings through regulated private instruments. ~~~~ ~
The SIJyP receives statutory contributions from employers and workers. Minimum and maximum earnings subject to mandatory contribution are calculated using the MOPRE (discussed in greater detail in Part 111). Self employed workers-also mandated to participate in the SIJyP-contribute as both employers and employee on a presumed income roughly equal to the employee earnings subject to the mandate. lo Non-contributory pensions are granted to the elderly, the disabled, mothers o f seven or more children, Malvinas war veterans, and the relatives o f the political victims who “disappeared” during the military government. ” The PNC program i s examined in greater detail in Part 111, which includes description o f the various benefits paid under the program as well as administrative and budget details.
19
Pillars (or “tiers”)
Pillar One
Contributory
Affiliates choose between.. , Public (RPP) Commercial (AFJP) Administered by.. . PEA & PBU PEA & PBU ANSeS
PAP ANSeS I PillarTwo I I
PC Transition Generation
r insurance companies JO
PC ANSeS
Pillar Zero Contributory I PNC (social assistance) MDS
I I I I Source: Adapted from Bertranou, Rohan and Grushka (2003).
45. The SIJyP public second pillar RPP/PAP benefit remains a risk-pooling, defined benefit instrument. However, Gill et al., (2004) argue that the key feature o f sustainable instruments intended to meet the “consumptions smoothing” objective as the population ages, is greater “individualization”. Reform to national social security systems in Latin America have introduced this individualization in the form o f defined-contribution, commercially-managed retirement savings accounts. Elsewhere, notably in several countries in Europe and the former Soviet Block, “individualization” has been introduced through individual accounts with a “notional” defined-contribution (NDC), accumulation and rate o f return that retain PAYGO tax financing and remain under the direct administration o f the government. In Brazil, greater individualization was achieved in 1999 by altering the public pension benefit formula to tie pensions closely with contributions and l i fe expectancy. The common outcome o f this individualization is a shift in how demographic risk is borne, away f i o m the government and onto the individual, albeit to very different degrees. Whi le the RPP/PAP remains a defined benefit pension plan and lacks many o f the desirable characteristics o f the NDC instrument, the 1993 reforms introduced a much closer link between contributions and benefits that shifted a greater burden for consumption smoothing onto individuals.
46. Apart f i o m a better alignment o f different instruments (risk-pooling and individual savings) to more efficiently cover the losses from ageing, a multi-pillar structure i s important for diversifymg and distributing the risks to adequate income in old age between government, employers, and households. Instead o f government-and by extension, tax payers-primarily bearing the risk, as in a single pillar system, the multi- pillar approach’s m i x o f government guarantees, mandated individual savings, and voluntary pension arrangements-including those between employers and their workers-spread the demographic (longevity), macroeconomic (inflation and recessions) and investment risks (low or negative financial returns) to adequate retirement income. The diversification o f risk in Argentina’s multi-pillar system, although not yet optimal, is regarded as an improvement over that which prevailed under the single-pillar, defined benefit, P A Y G O system that existed prior to the 1993 reform.
20
I.d Separate, Independent Pension Plans
47. However, separate military, provincial and professional pension plans remain untouched by the institutional changes o f the last 15 years. Currently there are 141 pension plans in Argentina, operating independently from the SIJyP, each with its own eligibility requirements, minimum retirement age, benefit levels and average replacement rates. l2
48. In the public realm, in addition to special regimes for federal judges, the military and police, numerous separate defined benefit plans for subnational public sector workers, sometimes subsidized with public finds, continue to operate. In 1994 and 1996 selected provincial pension plans were integrated with the SIJyP. Provinces that chose to integrate their plans were required by the National Government to relinquish their right to provide pensions for their c iv i l servants, and to adjust the eligibility and benefit parameters o f the plans being transferred to the parameters o f the national system. The fiscal and efficiency results have been mixed (World Bank, 1998). But by the end o f the 199Os, the National Government abandoned the pol icy o f integration which had been applied to only 11 o f 24 provincial pension plans and 1 o f 24 municipal pension plans.
49. In addition to public plans for sub-national c iv i l servants, a wide array o f separate plans are offered by professional associations for accredited members o f their profession, such as notaries, medical doctors and others. These plans receive mandatory contributions from their particular professional group, and in turn offer benefits ranging from old-age pensions to maternity pay and even credit. Access i s strictly l imited to members o f a particular profession and mandatory contribution i s enforced through the professional accreditation process. Although created and sanctioned by provincial and municipal laws, the professional plans are unregulated, data on their solvency i s scarce, and monitoring o f their activities i s difficult. All these institutions are examined in greater depth in later parts o f this report.
l2 This figure includes the various benefit programs under the PNC. If these are not counted, the number o f pension plans that operate separately from the SIJyP falls to 136 (ILO, 2006).
21
50. ~ o ~ ~ ~ y in ~ ~ ~ e n t ~ n a i s less ~ e ~ ~ e ~ t among the elderly than a ~ o n g other age groups: by the end o f 2004, p ~ v ~ - t y m o n g the ctdcrly was 19 percent, c o ~ ~ ~ e d to 40 percent a~~~~~ the total p ~ p ~ ~ a t ~ ~ n . Extreme povcrty i s also lowcr at 5 percent a ~ # n ~
15 percent ~~~~~ the total p o p u ~ a t ~ o n . ~ ~ As shown in Tabfc 3, a
h with the crisis in 2002.
Figure 5. Poverty ~ r n ~ ~ ~ the Etdcrly vs. Total P ~ p ~ l ~ t ~ ~ ~ in Argentina
50
45
40
35
30
$ 25
20
15
10
5
0 Total 654
Below poverty line
Total 65+
Below extrema poverty line
o f poverty a ~ o ~ ~ the eldcrly i s stro also associated with rn
d U ~ ~ ~ ~ ~ ~ - - ~ ~ ~ the extent 2002). In A r ~ ~ ~ ~ i ~ ~ ~ and
elscwhere in the region, social security benefits ~ ~ o ~ ~ ~ ~ ~ t ~ ~ r ~ or ~ i o n - c o ~ t ~ ~ ~ t o ~ y ~ play a very l ~ ~ o ~ a n ~ role in r c d u ~ i n ~ poverty. According to cstirnatcs using the EPW, in tfzc
22
absence o f social security benefits, poverty among the elderly would rise to over 50 percent. Similarly, in the absence o f social security benefits, extreme poverty among the o ld would be as high as 30 percent. Furthermore, the regularity and reliability o f pension benefits provide effective buffers against the kind o f income risk generated by changes in macroeconomic conditions and crises. In a study o f income risk and poverty in Argentina straddling the 2001 -2002 crisis, Cruces and Wodon (2002) conclude that households with elderly members were less exposed to income risk compared to households with inactive or unemployed members.
52. The importance of social security for keeping households out o f poverty i s observed elsewhere in the region as well. Social security benefits constitute a significant proportion o f total household income: 65 percent in Uruguay, 89 percent in Brazil and 87 percent in Argentina (Rofinan, 2005). In Brazil, Barrientos (2003) finds that having a pension recipient in the household lowers the probability that the household i s poor by 2 1 percent. Thus, pension benefit levels and the extension o f coverage explain not only the incidence o f poverty among the elderly, but the differential between this group and the total population (CELADE, 2003).
I l a . Patterns in Social Security Coverage in Latin American Countries
53. The level o f social security coverage among the elderly in Argentina i s relatively high when compared to other countries in Latin America. Gill et al. (2004) show that among 10 selected Latin American countries, Argentina has among the highest proportion o f pension recipients among the population aged 65 and over. Rofinan (2005) includes seven additional countries in the analysis and finds that Argentina is only surpassed in coverage o f the elderly by Uruguay and Brazil, and by Chile and Bol iv ia i f non-contributory benefits are also taken into account. But as explained in the introduction, what is particularly worrying about the coverage o f pension benefits in Argentina is that, despite these relatively high levels, there i s a notable downward trend in the last decade. This sharp fal l in the portion o f elderly receiving benefits has not been observed in other Lat in American countries.
54. Among selected Latin American countries, social security coverage for the elderly is positively associated with national income. However, coverage in Argentina, which in 2000-2002, prior to the full unfolding o f the crisis, had the highest GDP per capita, appears relatively l o w than would have been assumed for i t s GDP per capita (see Figure 7). This outcome i s l ikely to reflect not only to the new strict eligibility requirements in the contributory system since 1993, but also to the relatively limited deployment o f non- contributory benefits. Further, Argentina seems to achieve lower coverage outcomes, again measured by the total share o f beneficiaries among the elderly, than do i t s neighbors, when compared to public spending (see Figure 8). Total levels o f coverage are highly correlated with social security expenditure. Both Chile and Brazil achieve higher levels o f coverage o f the elderly for a lower per capita expenditure on social security. Whi le pension spending i s highly correlated with the share o f the elderly in the population, and per capita spending in Chile and Brazi l is lower partly because their populations are younger, coverage in Argentina is st i l l significantly lower even afier controlling for these demographic differences (Grushka, 2006). Although this
23
benchmarking uses data from prior to the crisis, and GDP per capita fell considerably and only recovered after several years, l o w and declining coverage represents a long-term trend, as shown in the introduction.
90 -
80 -
70 -
60 -
50 -
40 -
30 -
20 -
10 -
O S
Figure 7. Per Capita Income and the Share of the Elderly Receiving Benefits, Selected Latin American Countries, 2000 - 2002
br ur
bo
1
100 I I
Gross Domestic Product per capita (constant 1995 US$)
Figure 8. Public Spending on Social Security and the Share of the Elderly Receiving Benefits, Selected Latin American Countries, 2000 - 2002
n 100 s 90
80
70
Q) 60 ’ 50
.E” 30
f v )
A v
%! 0 0 40
J
J 20
3 10 0 0 v ) o
+ ur
0 200 400 600 800 1000 1200
Public Social Security Expenditure per capita (constant 1997 US$)
ource: Grushka (2006), based on data from CEPAL (2005) and Rofman (2005). Nore: The spending data for Bolivia in the figures above may omit spending on non-contributory benefits while coverage data reflect these benefits.
24
II. b. A Profile of Argentina’s Elderly
55. Given the importance o f social security in preventing poverty among the elderly, the country-level analysis o f coverage in Argentina and how this compares with other countries in the region, the remainder o f Part I1 i s dedicated to an examination o f social security and other instruments for securing old-age welfare at the household level, and exploits existing sources o f micro-data (such as the national EPH and E C V surveys) as wel l as the new survey o f the elderly (ETEEP) commissioned by the Wor ld Bank for this report (see Box 3). As mentioned in the introductory section, i t i s important to note that none o f these sources o f data can be used to paint a complete picture o f the role social security and private pensions play in securing household welfare. The analysis suffers from an urban bias that pervades much o f household-level empirical work in Argentina, and should be interpreted with this bias in mind. T w o additional caveats about the ETEEP have to be made up front. The first has to do with the timing o f the survey. Interviews were conducted in late 2003 as Argentina was just beginning to recover from the crisis-the magnitude o f which is l ikely to have affected the behavior and outlook o f respondents significantly. The second i s the l imited extent to which lessons can be drawn from behavior reported by the elderly today to guide pol icy for the elderly in the future. Social security institutions and Argentina’s labor market have undergone profound structural changes in the last two decades that have to be kept in mind when considering the implications o f the results.16
56. The survey o f the elderly was designed to provide answers to the following set o f questions. If the formal pension system i s covering fewer o f Argentina’s elderly every year, how are the old financing consumption? What are the insurance and coping strategies o f the elderly that the system does not reach? Are the elderly that go without cover worse o f f or just as well-off as those covered? Is lack o f coverage mostly determined by exclusion or individual and household choice? What are the institutional, labor market and household factors that determine whether an individual o f retirement age receives a formal pension? And finally, what conclusions can be drawn from the past and present behavior o f the elderly that would need to be considered by Government as i t undertakes reforms?
57. Before turning to formal empirical analysis, simple descriptive statistics provide an interesting snap-shot o f the elderly in Argentina (readers are reminded o f the limited coverage o f the ETEEP sample which largely explains statistics that may diverge with those drawn from the E P H or ECV, see the Technical Annex o f this report). Table 3 presents differences between covered households and those excluded from coverage under the system.
58. O f the ETEEP sample aged 65 and older, roughly 29 percent l ive without any type o f social security benefit. Those without coverage are relatively younger, averaging 7 1 years o f age compared to a mean age o f 75 o f those receiving benefits. The uncovered
l6 Having said this, a sizeable share o f the sample worked, contributed and evaded under Argentina’s current pension institutions. About 50 percent o f the ETEEP sample was below the retirement age in 1994 when the SIJyP was introduced. In 2003 when the survey was taken, 10 percent o f respondents were below the retirement age.
25
elderly are also predominantly women (67 percent o f those without coverage); only 70 percent have withdrawn from the labor market (compared to 90 percent inactivity among the covered); 22 percent keep working (compared to just 8 percent o f benefit recipients who work); and 8.3 percent seek but fai l to find employment.
59. On average, those without benefits have one year less o f schooling (5.5 years as opposed to 6.6 years o f education among those covered); l ive in larger households (2.9 members as compared to 2.5 members in covered households); and have lower incomes ($310 compared to $444). Most o f the sample owns the home in which they live. Home ownership i s highest among the covered elderly (at 79 percent) and among these, highest among the elderly receiving retirement pensions (85 percent). However, home ownership among the non covered (72 percent) i s also significant. Only 62 percent o f recipients o f the mainly targeted non-contributory pensions own their home. Few elderly households report holding long term savings or investments. Savings and investments are reported more frequently (8.5 percent) among recipients o f contributory benefits (and most frequently among recipients o f retirement benefits, at 10.4 percent). Among the elderly who are not receiving any kind o f benefit, 6.4 percent report holding long term investments.
Table 3. Summary Statistics for Covered and Non-Covered Elderly, ETEEP 2003
Nobenefit Total Survivor- Contribu- Non con- Wi th any ship tory tributory benefit
Retirement Disability
1 2 3 4 = 1+2+3 5 6 = 4+5 7 8 = 6+7 Weighted cases 843 98 543 1,484 140 1,644 665 2,309 Distribution (%) 36.5 4.2 23.5 64.3 6.1 71.2 28.8 100.0 Mean age 75.1 72.1 75.3 75.0 75.3 75.0 71.3 74.0 Proportion female (%) 44.0 34.4 95.6 62.3 69.6 62.2 67.2 64.1 Private health coverage (%) 12.5 8.5 5.8 9.8 5.1 9.3 8.5 9.1 Employed (%) 9.4 4.0 6.6 8.0 5.9 7.8 22.1 11.9 Inactive (%) 86.8 96.0 92.6 89.5 91.0 89.7 69.6 83.9 Unemployed (%) 3.8 0.0 0.8 2.5 3.1 2.5 8.3 4.2 Mean years of schooling 7.9 6.6 5.3 6.9 4.0 6.6 5.5 6.3 Household size 2.41 2.75 2.55 2.48 2.76 2.51 2.93 2.63 Mean household income 549 443 348 468 209 444 310 406 Working years 37.1 30.8 11.8 27.5 24.9 27.3 22.8 26.0 Contributing years 31.0 23.9 3.4 20.4 5.0 19.1 9.9 18.9 Own house (%) 84.9 80.3 73.5 80.4 61.7 18.8 72.7 77.0 Sewerage in the block (%) 66.2 51.4 60.8 63.6 37.5 61.4 49.4 58.1 Long-term investments (%) 10.4 7.3 5.5 8.5 1.5 8.0 6.4 7.5
Source: Grushka (2006).
60. As already discussed in the introduction and examined in greater detail in later sections, a history o f labor market activity and contribution to the social security system i s a critical determinant o f coverage. The elderly who do not receive benefits averaged fewer years o f work (23 vs. 27). Those without benefits have 10 years o f contribution on average, while those covered by the system averaged 19 years o f contributions, which reflect both shorter contribution requirements in the past and less stringent enforcement o f these requirements.
61. The share o f the ETEEP sample that receives benefits rises with age among both men and women, partly reflecting the age and contribution requirements for contributory
26
benefits, but also the receipt o f partial benefits (the PEA), and non-contributory benefits (PNC) which become available at latter ages. From the age o f 85 (25 years after the current retirement age o f women, 20 years after the retirement age for men, and 15 years after the eligibility age for non-contributory benefits) coverage among ETEEP respondents i s consistently above 90 percent among men, but i s lower among women (although the sharp drop in benefit receipt among very elderly women may be an artifact o f the ETEEPs sample).
2 0.5 -
0.4 -
r, z
W 0 c
0.3 - 5 f 0.2 -
Figure 9. Share of the Elderly Receiving Benefits among ETEEP Respondents
0.1 - . n
. 0
8 0 0 . 0 0 0
O .
0 . 0 .
0
0
o female male
55 60 65 70 75 80 85 90 95 100
Age
Source: Staff estimates using ETEEP 2003.
27
Box 3. Surveys of the Elderly in Argentina and Other Middle Income Countries
Most o f the analysis in this report relies on data collected in October-November 2003 in the ETEEP, Encuesta a la Tercera Edad sobre Estrategias Previsionales, a special survey o f the elderly. The survey targeted households with a member aged 60 and over in urban areas o f Argentina, excluding the Patagonia Region. I t interviewed one individual aged 60 or over in 3014 households selected under a stratified probabilistic sampling. The survey instrument contained questions on individual and household characteristics, household income, assets, expenditure, and livelihood strategies; the labor and pension history o f the respondent, and summary information on the economic status and characteristics o f other household members.
Micro-data focusing on the elderly i s very rare. Two other recent surveys in Brazi l and South Africa collected under the Non-Contributory Pensions And Poverty Prevention research project (www.idum,man,ac.uWncuus) provide useh l cross-country comparisons. There are important differences in the sampled population that need to be taken into account. The ETEEP (2003) Survey targeted urban areas in Argentina, whereas the Brazil and South Africa datasets (2002) included both urban and rural areas. While the ETEEP has wide coverage, the latter are also restricted to specific regions (Western and Eastern Cape in South Africa, R io and Ilheus in Brazil), and in the case o f South Africa the survey excludes whites.
Table 3.1 provides some information on work and pension receipt among people aged 60 and over in urban areas across the three samples. Retirement ages vary across pension plan and country. In Argentina the target retirement age for contributory plans i s 60 for women and 65 for men (same as in the non-contributory plan in South Africa), but early retirement i s available in the contributory program (same as in the contributory plans in Brazil) and no specific retirement age in the non-contributory plan, except in the old age non-contributory benefit. In Brazil, non-contributory plans in urban areas have an age o f entitlement at 67, and in the rural plan at 55 for women and 65 for men. The Table suggests that Argentina has the lowest incidence o f pension coverage among the elderly, and Brazil the highest (note, a different base i s used in Table 2). By contrast, activity rates are highest in Argentina.
Table 3.1. Work and pension receipt among people aged 60 and over in urban areas: Argentina (2004), Brazil (2002) and South Africa (2002)
Argentina Brazil South Africa n=3014 n=98 1 ~ 6 5 9
Work and pensions
% with pension 61.0 89.0 63.6 % without pension 39.0 11.0 36.4 % active 23.5 15.1 9.9 % inactive 76.5 84.9 90.1
% inactive without pension 22.4 6.8 28.7 Source: Bamentos (2006); samples are: for Argentina i s all urban areas except Patagonia region, for Brazil i s Metropolitan Rio and Ilheus, and for South Africa i s Western and Eastern Cape region.
% active wi th pension 6.9 10.9 2.1
The incidence o f pension recipients active in the labor market i s highest in Brazil, where early retirement followed by continued employment i s common among those with contributory plan coverage, and lowest in South Africa where high unemployment rates for the population as a whole, let alone older workers, significantly restrict employment opportunities at later ages. I t i s likely that households with older members who are inactive are vulnerable. The incidence o f older people inactive and without a pension i s highest in South Africa and lowest in Brazil.
Table 3.2 contains some information on the livelihood protection instruments available to households wi th older people. The data for Brazil and South Africa are directly comparable in that the responses are to the same question. In the case o f Argentina, the question i s different, and the possible responses more restrictive. However, some information can be extracted from the comparison. Family and community networks are an important source o f livelihood protection in all three countries. The banking and financial systems appear to be less important, certainly much less important than consumer credit. The impact o f financial difficulties on food consumption i s clearly observable for Brazil and South Africa, and reflects a much greater exposure o f households with older people in South Africa. (continued on next page)
28
(continued from previous page)
Table 3.2. Livelihood protection among people aged 60 and over in urban areas: Argentina (2003), Brazil (2002) and South Africa (2002)
Brazil
Ask fiends and relatives for help Ask employer for help Ask NGOKhurch for help Borrow money from the bank Cut down on food Find extra work Buy foodgoods on credit n.a. is not available
Argentina n=3014
I n the last three months has your
household had to ... ?
% selecting the category
12.7 n.a. n.a. 3.5 n.a. n.a. 13.5
n=98 1 When your
household is in financial diflculty
do you ... ? % selecting the
category
42.8 1.3 1.4 9.9
11.2 5.0 4.7
South Africa s 6 5 9
When your household is in financial
dificulty do you ... ?
% selecting the category
49.8 7.7 4.7 9.1
38.5 25.5 14.3
Barrientos (2006); samples for Argentina i s all urban areas except Patagonia region, for Brazil i s Metropolitan Rio and Ilheus, and for South Africa i s Western and Eastern Cape region.
62. The reported retirement ages o f elderly men and women receiving contributory pensions peak at 55 , 60 and 65. T h i s may reflect the differences in regime under which participating respondents in the ETEEP sample worked, gained r ights and retired, and the increase in the national retirement age in 1993. These peaks also show the relevance o f the SIJyP reform and the institutions it set in place to the sample. However, there i s considerable dispersion around these peaks. Lower reported retirement ages can reflect the relatively more generous parameters o f pension plans for sub-national c iv i l servants (a matter taken up in detail in Part IV o f this report), disability benefits, survivors’ benefits, special regimes, and potential fraud.
63. Respondents’ causes for becoming a beneficiary are presented in Figure 11. There are important, if expected, differences in the responses between elderly men and elderly women. Most covered men report retiring because they had fulfil led age requirements. The most frequent response given by covered women is the death o f a spouse, thus qualifyrng for a survivor benefit. A significant portion o f elderly men and women reported chronic illness as the main reason for retiring. Less than ha l f a percent o f covered men and only 1 percent o f covered women reported claiming benefits because o f a lack o f employment. A higher percentage o f covered elderly reported early retirement.
29
Figure IO. Age at lcflts Awa orted by co and en, 2
I 4
12
20
8
6
60 -
55 -
65
3s do 44 48 52 55 60 $4
aga af retrewnt rn male
when asked the most i ~ ~ p o ~ ~ ~ ~ t reason u.hy they
as never having co social security,
67. The ETEEP data allow us to examine whether there are significant differences in the determinants o f receiving contributory and non-contributory benefits. Because Argentina’s regularly deployed surveys do not distinguish between benefit-type, this refinement o f the analysis was previously not possible. The analysis shows that while the pattern o f significance is similar, the relative importance and magnitude o f the determinants o f coverage changes depending on type o f benefit, contributory or non- contributory. M e n are 60 percent more l ikely than women to receive contributory pensions which reflects their greater past participation in the labor market and probably in “formal” jobs. Those aged over 70 are three times more l ikely than younger (65-69) cohorts to receive contributory benefits. T h i s may reflect the more stringently enforced eligibility requirements since 1993 lowering the relative rates o f contributory pensions among younger cohorts o f the elderly. Each additional person in the household decreases the odds o f having a contributory pension by 10 percent. Although this result could be taken as evidence o f a preference for a larger family as an income security strategy, i t could also reflect the larger average size o f poorer households.
68. Completing primary school increases the likelihood o f having contributory coverage. Each additional year o f work increases the likelihood o f contributory cover by 6 percent. Work in larger f i r m s increases the likelihood o f contributory cover by four times. And as in the previous results, having worked in the construction sector lowers the likelihood o f contributory cover. Home ownership and access to sewerage increase the likelihood o f receiving a contributory pension. The likelihood a respondent receives a non-contributory pension i s greater for older respondents, those living alone, and widows. These results are largely expected, given the population targeted by Argentina’s non- contributory pension programs, which has specific benefits for surviving spouses and for people older than 70.
69. The findings thus far privilege the argument that the lack o f social security coverage among today’s elderly i s a manifestation o f exclusion during working life. Obstacles and difficulties in making contributions to a pension system when working, and problems in design and implementation o f Argentina’s non-contributory pension system, are the primary explanations for l o w and declining household coverage. These arguments are to a large extent supported by the reasons respondents to the ETEEP reported for failing to contribute to social security, presented in Figure 13. Whi le the answers to this sort o f question (that elicits respondents to take responsibility or to apportion blame) have to be interpreted with caution, the largest segment o f responses point to the employer as the “gate-keeper” to coverage.
32
71. Access to ~ ~ n s i ~ n ne^^^ i s cfoscfy related to the history o f ~ # ~ ~ ~ ~ ~ ~ ~ t ~ o ~ s to social security system and linked to ~ n d ~ ~ i d ~ ~ ~ s ~ labor history, Several prior studies show
33
all, where individuals encounter social insurance systems and j o i n them-in a decision made sometimes on their own, others in conjunction, and often under the compulsion o f their employer. In the interest o f fiscal sustainability o f social assistance programs, pol icy makers prefer individuals to at least reach the minimum threshold o f contribution required for contributory coverage (in Argentina, 30 years at age 60 for women and 65 for men to obtain the PBU, and 10 years at age 70 to get the PEA), which makes individuals’ history o f contribution and evasion behavior o f particular interest (see Bertranou, 2006). l8
72. In this section, labor histories and contribution behavior collected in the ETEEP are examined. Given that pension coverage requires cumulative years o f contribution, contribution density-Le., the share o f an individual’s working l i f e during which he made contributions to the social security system-best represents the probability o f being covered by pension benefits. However, since the number o f jobs for which respondents to the ETEEP failed to report their contribution behavior i s very high, attention needs to be given to reporting behavior and, accordingly, the analysis needs to control for the determinants o f contribution density. The distinction between non-reporters and non- contributors (who, by definition, reported) is important to the extent that non-reporting could proxy for purposeful intent and reflect the exercise o f personal preference to evade the pension system during a particular employment spell.
73. Reporting and contribution behavior are considerably different depending on the sex o f the respondent. M e n failed to report in 27 percent o f j o b episodes. Further, when they did report, men said they did not contribute in 13 percent o f their jobs (employment episodes), but made contributions in 60 percent o f employment spells. In 51 percent o f jobs, men contributed for as many years as they worked (i-e., reported the maximum contribution density), and in 9 percent o f the jobs they did not contribute for as many years as they worked, but for a shorter period (i-e., contribution density was positive but less than one). In the case o f women, the reported contribution scenario looks worse. In 31 percent o f their jobs women did not report, and for the jobs in which they reported, women failed to contribute in 27 percent. However they contributed in the remaining 42 percent o f jobs. Women had the maximum contribution history in only 36 percent o f their employment spells.
l8 Despite recent additions, studies on individual contribution behavior are still scarce, mainly because specific data collection is required. Arenas de Mesa, Bravo and Mitchell (2006) study the determinants o f contributions to the pension system in Chile, based on a specific household survey o f labor and social security issues. They find that contribution history from self-reported data i s considerably lower than i s typically assumed. Quintanilla (2004) uses the same survey to study the transitions between contributing- jobs, non-contributing jobs, unemployment and inactivity. Buchelli (2004) studies contributions to the social security system in Uruguay and finds an increasing correlation between contribution behavior and education, particularly at high levels o f education, and attributes that link to institutional factors. In a regional study for Latin America, Auerbach, Genoni and Pages (2005) analyze contribution patterns for different labor categories and find that, to a large extent, low rates o f contribution are determined not only by the l ow willingness to participate in pension programs but also by the inability o f governments to enforce the mandate to contribute. These studies and how the results compare with similar estimates from Argentina are reviewed in Bertranou (2006). l9 The longitudinal analysis takes each employment episode reported by respondents as a separate observation. This not only increases the sample size, but allows us to control for a host o f non-observable characteristics by conducting the estimation using fixed-effects techniques on a panel o f jobs.
34
35
service than non-reporters. Thus, while non-reporters and non-contributors are both mainly classified as employees in small size firm or self-employed workers, they are quite different in terms o f other characteristics, mainly the features that distinguish the jobs typically held by women.
77. Contribution density varies with individual and household characteristics (see Table 3). Men, married individuals and heads o f households show higher densities. Contribution density increases together with education levels. Individuals who own their dwellings tend to have higher contribution densities, as wel l as those who made investments to secure o ld age income. When the regional dimension i s considered, contribution densities vary little between 0.61 and 0.64-except in Greater Buenos Aires, where contribution density rises to 0.74. Contribution behavior differs significantly with the size o f firm (Table 4). Jobs in small f i rms, with up to 5 employees, have the lowest contribution density (0.40). Jobs in medium size f i r m s show a much higher density value and a substantial share o f jobs with maximum contribution density. Finally, large f i r m s concentrate more than 38 percent o f the jobs and have a very high contribution density (0.90).
Table 4. Characterization of Contribution Density, by Individual and Household Characteristics of Reported Employment Episodes
Employment Contribution density Employment Contribution density episodes Mean Std. Dev. episodes Mean Std. Dev. Variable Variable
Sex Household Female 1771 0.56 0.48 Head o f hh 3078 0.72 0.43 Male 2216 0.77 0.39 Non head o f hh 904 0.55 0.48
Civil Status Dwelling Single 319 0.69 0.45 Yes 2980 0.70 0.44 Manied 2027 0.7 1 0.43 No 905 0.61 0.46 Widow 1291 0.63 0.46
Literacy Investment Literate 3806 0.69 0.44 Yes 352 0.75 0.41 Non-literate 181 0.37 0.47 No 3635 0.67 0.45
Education Level Region Incomplete Primary 1507 0.58 0.47 cuyo 182 0.63 0.47 Complete Primary 1276 0.67 0.45 Amba 1766 0.74 0.42 Incomplete Secondary 400 0.75 0.41 NEA 365 0.61 0.47 Complete Secondary 448 0.81 0.37 NOA 430 0.63 0.46 Incomplete Higher Education 107 0.88 0.30 Pampeana 1244 0.64 0.45 Complete Higher Education 239 0.88 0.31
Source: Bertranou (2006).
78. The contribution densities o f women are not significantly different across sectors, except in the fol lowing two cases: finance, that has a negative effect with respect to commerce, and education and health services, that has a positive effect possibly because many o f the jobs in this sector are performed in the public sector, where evasion i s relatively more difficult. In contrast, there are significant differences from sector to sector in the contribution behavior o f men. M e n working in primary activities have slightly lower contribution densities, while jobs in utilities, finance, public administration, and education and health services have significantly higher contribution densities than those in commerce. The duration o f a particular employment episode has a positive effect on contribution density, especially for men. Labor category appears to be
36
important for men but not for women. Self-employed male workers have considerably lower contribution densities than salaried men. Finally, both in the case o f men and women, there are strong positive effects on contribution density with an increase in firm- size.
Table 5. Characterization of Contribution Density, by Size of the Firm of Reported Employment Episodes
Employment episodes Contribution density # YO Mean Std.Dev. p25 p50 p75 Size o f firm
1 to 5 1,266 34.4 0.40 0.46 0 0 1 6 to 39 1,002 27.2 0.77 0.40 0.69 1 1 40 or more 1,417 38.5 0.90 0.28 1 1 1 Total 3,685 100.0 0.70 0.44 0 1 1
Source: Bertranou (2006).
ILe. I s Continued Labor in Old Age a Viable Income Substitute for Social Security?
79. The focus i s now shifted to a closer examination o f the current labor market participation o f older people and the extent to which employment constitutes an effective livelihood strategy as a substitute and/or a complement to formal pensions. Declining coverage rates wil l undoubtedly reduce the social protection afforded by pensions. An important pol icy question i s whether continued participation in the labor market can compensate for declining pension coverage. In OECD countries, withdrawal from the labor market is largely explained by the presence and design o f employment-based pension systems and public assistance programs (Gruber and Wise, 1999). In low- income countries, the absence o f pension systems makes continued work a necessity for older people and health factors become dominant in the decision to continue working (Benjamin, Brandt et al, 2003). In middle-income countries, l ike Argentina, i t i s l ikely that a mix o f factors can explain labor supply at later ages: the influence o f pension systems on labor market withdrawal i s stronger for workers in formal employment, but considerably attenuated for the rest (Clark, York et al. 1999).
80. Labor market participation o f the elderly in Argentina compares reasonably wel l with other countries in Latin America at a similar stage o f economic development and coverage o f pension provision. Across Latin America, earlier withdrawal from the labor market i s related to economic development-a pattern that i s consistent among the elderly in OECD countries. Aggregate data on participation fa i l to show any direct relationship between participation and the economic need o f older people. Figure 16 compares the participation o f poor and non-poor older people. Only in Uruguay, El Salvador and Brazi l are participation rates higher among poor than among the non-poor elderly. For the majority o f countries in the region, the labor market participation rate o f the non-poor elderly exceeds that o f the poor. This “gap” in participation is not directly related to the share o f older people receiving pensions in each country. Argentina has the largest gap in participation between the poor and the non-poor. Thus, while labor force participation o f the elderly, at around 23 percent, i s comparable with other countries at a similar stage o f economic development and pension provision in the region, i t is especially l o w among the poor.
37
pation o nd Y (Aged 60 an urban a e l
I 5tr
h
u &? Y d
38
83. Turning to occupational characteristics, a significantly higher share o f active respondents i s employed in construction, transport, utilities and services, compared to the last j o b o f inactive groups.2o The share o f active respondents reporting self-employment in their current j o b is twice as high as among the last reported occupations o f the currently inactive elderly. This may indicate that self-employment constitutes a strategy for older people to continue in employment later in l i fe because the opportunities for dependent employment are restricted for older workers.21
84. Active respondents appear to have, o n average, reasonably long spells in their current employment compared with the length o f the last j o b for those who have withdrawn from the labor market and are receiving pensions. They also have, on average, longer engagement in the labor market and more jobs in their l i fet ime than those older people who are currently inactive: nearly one third more jobs than inactive non- pensioners. Their contribution density is significantly lower than inactive pensioner respondents, although higher than among the inactive non-pensioner respondents. Taken together, these variables suggest that active older people have worked longer but have had a greater share o f informal work during their working lives.
85. Active respondents are significantly less l ikely to report poor or very poor health, and are more l ikely to report good or very good health. By comparison, inactive non-pensioner respondents are the most l ikely to report poor health and the least l ikely to report good health.
The elderly who work also appear to be healthier.
86. Moving on from these simple comparisons, Figure 16.a shows the percentages o f respondents within each decile o f estimated potential earnings that are active. Figure 16.b shows the percentages o f a l l active respondents to be found in each o f the deciles o f estimated potential earnings. Current participants in the labor market are concentrated in the higher deciles o f predicted earnings. Few o f those with predicted earnings in the l ow deciles are active. The vast majority o f respondents predicted to have earnings in the top decile are active (91.7 percent) and this also applies to the ninth decile (67.4 percent). In Figure 16.b, over three quarters o f active respondents can be found in the top three deciles when the full sample i s considered. If only men are considered, over one hal f o f active males can be found in the top three deciles o f predicted earnings.
87. This analysis shows that the elderly who are currently active in the labor market are also those with higher potential productivity, i.e., those with higher potential earnings. T h i s suggests that in Argentina’s labor market less productive older workers are filtered out through voluntary or involuntary withdrawals and/or pension incentives. Whi le the urban bias o f the data i s an important driver o f these results and has to be kept in mind, the main conclusion that can be made from these finding i s that only elderly men and women with higher predicted earnings are l ikely to be in employment in later life,
2o Where the comparison between the two groups i s on labor-market variables, the last reported j ob o f the respondents who are not currently working i s taken. 2’ This could result either because f i rms expel workers at the retirement age (‘push’), or because dependent employment pay and conditions are unattractive for older workers (‘pull’). These generate compositional effects, where dependent employees retire leaving the self-employed a higher proportion o f those active at later ages.
39
suggesting that continued employment i s unlikely to be an effective alternative livelihood strategy for older people in l o w income and vulnerable households.
Figure 16a. Percentage of Active Respondents in each Decile of Predicted Earnings
Figure 16.b. Percentage of all Active Respondents in Deciles of Predicted Earnings
40.0
4 e I 20.0 3
ii E
0.0
0.0 I 0.1 1 0.0 I 0.8 I 2.4 4.4 1 9.8 I 15.4 I 27.7 I 37.6 0.5 I 1.9 j 3.0 I 5.6 I 6.5 1 9.1 1 13.1 I 14.3 I 19.9 I 23.6
D a c l h of predicted earning8
:ource: Bamentos (2006).
88. Labor market participation does not appear to compensate for the decline in pension coverage in Argentina. While participation in the labor market can be an important livelihood protection strategy for older people with high potential earnings, i t is unlikely to be an effective strategy for older people with l o w potential productivity. The opportunities and benefits from “active” ageing appear to be skewed towards the healthier and wealthier among the old, at least as far as remunerated work i s concerned.
40
89. However, these results seem to also shed more light on the discussion o f exclusion and household preferences in the earlier section, and require that the earlier findings be further nuanced. Those who continue to work in old age and are not covered by the pension system, are not only those with the best prospects in the labor market: they are also those who have the longest history o f work; the highest number o f jobs; the largest number o f other household members who work; and lower contribution densities, although not as l o w as the inactive and uncovered elderly.
90. These results identify a group within the uncovered elderly whose current status outside the social security system has little to do with vulnerability or historically poor labor prospects, and which may have chosen to avoid forms o f employment where the mandate to participate was dif f icult to evade. Having said this, the analysis also identifies a group o f uncovered elderly whose employment prospects have always been poor, with less involvement in the labor market in the past, and greater reported health problems. For this second group, the exclusion explanation for l ow coverage may hold, and the current lack o f coverage is an immediate pol icy concern.
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Part 111. Closing the Coverage Gap
91. The summary in Part I1 o f the analytical work using household data clearly shows contribution history and labor market factors that influence contribution behavior are important determinants o f coverage outcomes. The analysis identifies groups that may be choosing to evade the system - o n their own or in collaboration with their employers. And there are also those whose lack o f contributions raises concerns about exclusion, and that this exclusion may take the form o f employers acting as gate keepers. Also apparent i s that the labor market only offers a viable alternative to the pension system for those who have always had and continue to enjoy good labor prospects. Revealingly, those who continue to work in old age are individuals who report the longest employment histories. Furthermore, the working elderly in the ETEEP are not only those whose predicted labor incomes are relatively high, but also those who have contributed to the pension system for fewer years throughout their working lives (than those who are inactive and receiving benefits).
92. The analysis points to a pol icy priority among the three objectives o f social security discussed in Part I o f this report: preventing poverty in o ld age. Whi le the other two objectives-consumption smoothing and income adequacy-are also important and deserve the attention o f pol icy makers, among the prospective losses from ageing, poverty in old age i s a risk that households are least able to cope with on their own.
I ILa The Distinctions between “Pillar 0” and “Pillar 1 97
93. Since the publication o f Averting the Old Age Crisis (World Bank, 1994) where the basic architecture o f the multi-pillar system o f public and private pension provision was described, a distinction has emerged between two types o f pensions s t i l l directly administered by government: “fzrst pillar” pensions paid to individuals with a history o f contributions to an earnings-related retirement security regime, and “zero pillar” pensions offered universally or targeted to the elderly poor regardless o f whether they have contributed to an earnings-related regime or not (Holzmann and Him, 2005). However, according to the analytical framework presented in Part I, when the pol icy objective i s to provide an absolute minimum income to prevent poverty among the old, the distinction between afirst pil lar that conditions benefits on contributions, and a zero pillar that pays pensions regardless o f contribution history can be confusing. Neither i s structured as actuarial insurance, yet both pillars pool the risk o f poverty in old age; both can be structured to pool the r isk o f other contingencies that markets are unable to manage or manage poorly, such as life-time l o w earnings and inflation; both pillars are directly administered by government; both pillars are typically financed o n a PAYGO basis; and both pillars receive “contributions” either from payroll taxes or from other levies with a broader base such as taxes on income or on consumption.
94. Once the rationale for prescribing public PAYGO risk pooling to cover the relatively rare loss o f poverty in o ld age i s accepted, and the level o f pooled benefits are set with care not to upset household incentives to save in earnings-related plans, the distinction between a zero pil lar from the f irst becomes less important. In fact,
42
perpetuating a distinction between pillar zero and pillar could potentially lead to undesired outcomes, and even increase the vulnerability o f the poorest in society.
95. How? First, public PAYGO systems that deny minimum pensions to individuals without a history o f explicit contributions, but that pay benefits that are nevertheless guaranteed by government transfers, can redistribute income from all current and future tax payers to those who have accumulated pension r ights. The benefits o f Argentina’s “contributory” public pensions are financed mostly from general revenue transfers. But even where the contribution and benefit parameters o f pillar one are set to be “self financing”, who pays for short-falls between benefits and contributions during economic downturns? All current and future tax payers “contribute” to maintain the benefits paid to a relatively smaller group o f “covered” workers. Second, separate, seemingly non- contributory transfer arrangement to the elderly poor are often perceived as charity rather than just another instrument with which households can manage risks to income, and are often only reluctantly considered in budget allocations. Small budget allocations to “social assistance” pensions separated from the f i rst pillar are typically supported by small, relatively weak political constituencies, and have been historically vulnerable to budget cuts.
96. Does this imply that once zero-pillar “non-contributory” benefits are in place, that first-pillar, contributory instruments are redundant? N o t necessarily. Where a financially sustainable zero pillar exists, first pillar benefits, such as marginal-accrual minimum defined benefits, or a matching contribution scheme, can prove highly beneficial, but more as a means to increase incentives to participate in the earnings-related pillar, particularly among lower-income affiliates. Thus both pillar 0 and pillar 1 have an important role in closing the coverage gap when structured correctly: the former can cover the risk o f poverty in old age, and the latter can attract the participation and reward the savings effort o f lower income groups. However, even innovative incentive measures, such as Mexico’s Cuota Social matching contribution scheme, are as yet untested for their incentive effects (see Box 4). Should gains in participation fai l to materialize, the dangers o f regressive transfers and the political marginalization o f poverty programs discussed above, remain.
III. b. Advantages and Drawbacks of Alternative Public Pooling Structures
97. There are at least three basic alternatives for structuring the public pooled component o f a retirement security system. These are (i) a minimum pension guarantee, benefit top-up, or matching contribution scheme to workers who participate in a retirement security regime; (ii) a benefit targeted to the elderly poor; and (iii) a universal flat pension, sometimes called a “demogrant”-paid to al l men and women over some threshold age, regardless o f their means. In several countries these structures overlap.
98. From the conceptual discussion in the pervious section, in a country where al l individuals contributed to the earnings related pension system, a contributory minimum guarantee structured as a “top up” i s a satisfactory public pooling arrangement on i t s own: i t guarantees a minimum level o f retirement income at a minimum cost to tax payers and encourages workers to save in the earnings-related plan. However, as already pointed out, in countries where most workers will not have a sufficiently long history o f
43
contributions to the earnings related pension system, a top up conditioned on participation can not only exclude large segments o f the population, but also lead to undesirable transfers.
Box 4. The Cuotu Social in Mexico Commercial Second Pil lar
The Government o f Mexico introduced a flat contribution subsidy along with private individual accounts in 1997. The government makes a daily payment to the individual retirement accounts o f al l workers affiliated with the new private defined contribution pillar whose contributions are up to date.
This contribution, called the Cuota Social, is commission-free and does not vary with workers’ income. Cuota Social i s calculated as a percentage o f the minimum wage. When the new AFORE pillar came into effect in July 1997, the Cuota Social was set at 5.5 percent o f the monthly minimum wage and now equals 6.05 percent, reflecting adjustments for inflation. Because al l contributing affiliates to the reformed pension system in Mexico receive the same amount o f Cuota Social contributions in their individual retirement accounts, i t s share o f total pension contributions i s inversely proportional to workers’ incomes. That is, the Cuota Social bolsters the value o f low-income workers’ pension accounts more than that o f high income workers. In fact, Cuota Social contributions represent more than one-quarter o f the value o f retirement contributions for the 68.5 percent o f the Mexican workforce earning three minimum wages or less; i t accounts for almost 55 percent o f the retirement contribution for a worker earning one minimum wage.
The Cuota Social introduces a minimum income mechanism directly into the defined contribution pillar created by the Mexican pension reform. For workers earning up to three minimum wages, the Cuota Social i s greater than commissions charged to their individual contributions taken from wages, allowing their fbture pension benefits to be larger than their individual contributions. This serves as an incentive for low-income workers to jo in or remain in the formal sector by contributing to the defined contribution system. I t i s still too early to adequately estimate the effects o f the Cuota Social on workers incentives to jo in the AFORE system and to keep their contributions up to date.
However, the contribution subsidy i s not the only minimum income instrument in the Mexico’s multi- pillar system. AFORE affiliates wi th at least 25 years o f contributions who have not accumulated savings sufficient to finance a determined minimum annuity, qualify for a minimum pension guarantee top-up similar to that in Chile’s AFP system. This contributory instrument i s more targeted to the l ikely elderly poor than the Cuota Social, although a minimum history o f contributions i s s t i l l required and workers with the lowest life-time earnings in the Mexican economy are largely failing to participate in the pension system.
The fiscal burden o f the Cuota Social to the Mexican government will be substantial in the first decade o f reform. At 0.33 percent o f GDP at the outset o f reform, it i s the largest cost item among government contributions to the reformed pension system. However, as GDP and real wages grow, the relative burden o f the Cuota Social i s l ikely to decline, even allowing for increases in pension coverage.
Source: Gill, et a1 (2004).
99. Targeting public pensions to the elderly poor i s probably the public pooling arrangement that is closest to the risk pooling ideal to cover poverty in old age for middle income countries where many workers wil l fa i l to contribute regularly to an earnings- related pension pillar. This i s especially true if the targeted benefit i s financed with a broad based tax, such as VAT. However, means testing to target benefits efficiently also comes with complications and costs. Further, just as over-generous social assistance benefits can lead to moral hazard, so means tests can discourage private saving and wealth accumulation for retirement as wel l as continued work in old age. Finally, as mentioned in the previous section, means tested benefits are often regarded as charity and makes the benefits vulnerable to budget cuts, especially in economic downturns.
44
100. A universal flat pension does not strictly comply with the conceptual ideal o f a public risk pooling mechanism to insure against poverty in o ld age, since all individuals above a specified age would receive some benefit, not only those suffering the “bad state” o f poverty. However, they are the simplest public poverty-prevention mechanism to administer, with the lowest transactions costs. These benefit structures are found in developed countries, such as the United Kingdom and N e w Zeeland, as wel l as developing countries, l ike Mauritius. Correctly structured, universal flat pensions prevent governments from creating the disincentives to work and save that are often inherent in means testing. The main concern with universal minimum benefits is for fiscal sustainability. Whi le a large portion o f the transfer to the elderly can be regained by taxing universal pensions as any other form o f income (as in N e w Zealand’s universal flat pension) the financial sustainability o f the benefit will then depend on a government’s administrative capacity to claw back benefits from the non-poor elderly through taxation channels. The universal o ld age benefit in N e w Zealand cost 4 percent o f GDP in 2001 and i s forecast to grow to 9 percent o f GDP in 2050. Gill et al., (2004) argued that universal minimum pensions are fiscally unviable in most Lat in American countries, particularly in light o f competing demands for social protection for other vulnerable groups.
I IXc . Fiscal Costs of Direct Measures to Close Argentina’s Coverage Gap
101. Several proposals have emerged from stake-holders in the current pension reform discussion to close the coverage gap: (i) the creation o f a universal old-age pension benefit available to al l the elderly regardless o f their history o f participation; (ii) the availability o f this non-contributory benefits earlier (at age 65) than the current age requirement for social assistance pensions (age 70); and (iii) the “graduation” or creation o f a “proportional” minimum contributory benefit that would recognize a shorter history o f contributions at age 65 than the current 30 years required in the SIJyP (see MTEySS, 2003, UAFJP, 2003). This section reports on simulation results from A16s and Muii ioz (2006) which use incomes, labor and contribution histories in the ETEEP to estimate the fiscal costs o f a new non-contributory pension and a more proportional contributory minimum benefit as lower-bound complementary benefits to shore up the current and expected future coverage o f the SIJyP.
102. The objective o f this exercise i s to quantify current proposals and provide a “base line” estimate o f the fiscal costs o f these direct policies to extend coverage that i s informed by the actual reported labor and contribution histories o f today’s elderly. For this reason and with some important exceptions (detailed in Box 5), the simulation assumes no other changes are made to the pension system other than the elimination o f the PEA and PNC which would be replaced with new benefits available at earlier ages. Since the earnings-related contributory benefits o f the SIJyP are unchanged in these simulations, this estimate is a conservative scenario intended to stimulate further investigation o f options, and not as an endorsement o f any particular proposal. A wider consideration and costing o f options would need to include not only policies to cover poverty in old age, but also ways to increase participation and bring down the costs o f sustaining full coverage.
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Box 5. Costing Current Proposals for Full Coverage
In a new complementary scheme, based on existing proposals to extend coverage, the current PEA and social assistance pensions would be replaced with a Minimum Guaranteed Benefit (Prestacidn Minima Garantizada, or PMG). The State would guarantee a minimum level o f Total Benefit (Benejcio total or BT) equivalent to the amount o f the P M G for al l those people who have 10 years or less o f contributions to the social security system. A Total Minimum Benefit (Prestacidn Total Minima or PTm) would guarantee that everybody who has contributed between 10 and 30 years to the system w i l l collect a PT as a function o f the years o f contributions that w i l l in no case be less than the PTm. For individuals who have contributed for 30 years or more, pensions would be the same as under the current system, according to the rights granted by the reform law in 1993. The age to access old-age benefits is unified at 65 years for both men and women (one o f the important changes made to the parameters o f the SIJyP that i s discussed in greater depth as a pol icy option in Part IV). For those with less than 30 years o f contributions, a Basic Benefit (Prestacidn Busica - PB) would be paid to complement the amount in pesos o f the AFJP/JO and the RPPPAP, derived from the years o f contribution to the social security system unti l reaching the defined levels o f P M G or PTm. If the JO and/or PAP turn out to be higher than said levels, the PB i s equal to zero. Finally, the complementary set o f benefits maintains the transitional Compensatory Benefit (Prestacidn Compensatoria - PC) that the SIJyP currently pays in recognition for the years o f contributions prior to the effectiveness to the 1993 reform. The benefit i s calculated exactly as indicated in the reform law, as a defined percentage o f the remuneration o f reference, weighted by the number o f years paid into the previous regime. Current eligibility requirements for this benefit are also unchanged, requiring at least 30 years o f contributions to the system. Thus
Where: PT = P B U + PC + (PAP + JO) + PB
PT = Total Benefit P B U = Basic Universal Benefit PC = Compensatory Benefit PAP = Additional Benefit for Permanence JO = Ordinary Retirement Benefit PB = Basic Benefit n = Years o f contributions
The amount o f the PB i s defined as a function o f the following criteria: a) Ifn<lO, PBU = 0, PC = 0 and:
a. 1) (PAP + JO) < PMG,
PB = PMG - (PAP + JO)
a.2) (PAP + JO) 2 PMG,
PB=O PB=O
b) If 10 5 n < 30, PBU = 0, PC = 0 and:
b.1) (PAP + JO) < PTm,
PB=FTm-(PAP+JO)
b.2) (PAP + JO) 2. PTm,
c) If n 230:
PB=O y FT=PBU+PC+(PAP+JO)
Two criteria were used in setting minimum benefit amounts. Firstly, the amount o f the P M G was set equal to the amount o f social assistance benefits (namely the Heads o f Household emergency program) paid in December 2003. Secondly, the PTm was set at a higher rate to create incentives for individuals to contribute to the SIJyP. Except for the change in the age at which women can receive benefits, the conditions for access to the AFJP/JO and the RPPPAP remain the same. Also, we assume that the contribution rate for individuals i s 11 percent o f salaries and that o f employers for their workers i s 16 percent. These are the contribution rates originally set in the 1993 reform, which have been altered since (as discussed in Part IV).
Source: Albs and Muiiios (2006).
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103. To estimate the medium and long term fiscal cost o f the new benefit scheme outlined in Box 5, A16s and Mui i ioz (2006) use actuarial projection to the year 2050. Their model captures the impact o f changes in a series o f demographic, socioeconomic, social security and financial variables that affect the level o f public sector revenues and expenditures, based on the methodology in R o h a n et al., (1997). Details o f benefit parameters, macroeconomic variables and the assumptions o f how these variables change over the time horizon o f the projections can be found in A16s and Muii ios (2006).22
104. In the init ial simulation in which spending on public pensions without the new “complementary” benefit scheme is shown, the total social security deficit in 2003 is just over 4 percent o f GDP. When the new benefit scheme i s added to the current benefits paid by the SIJyP, the total deficit rises to almost 5 percent o f GDP in 2003 (see Figure 17). The additional cost o f the new benefits i s about AR$3 bi l l ion (2003 pesos), which represents 0.76 percent o f GDP or 19 percent o f current spending by ANSeS. The additional cost o f the new non-contributory benefits alone i s 0.51 percent o f GDP. However, as a share o f GDP the deficit cost o f these new benefits and total public pension costs declines. The deficit in terms o f GDP declines to just ha l f a point o f GDP by 2050.
Figure 17. Fiscal Costs of Full Coverage: Current SIJyP & Complementary Benefits (Percentage of GDP)
0.08
I“-., 1 SDendina. Current + ComDlementarv Benefits I
0.06 -
0.04 -
0.02 -
2039 9043 ”“4F-C
-0.02 - Deficit (fiscal cost), Current + Complementary Benefits
-0.06
Source: AMs and Muiiios (2006).
22 Ideally, one would have simulated a truly “proportional” benefit. However, the bimodal nature o f reported contribution history in the ETEEP only made i t possible instead to simulate the fiscal cost o f lowering the contribution threshold from 30 years o f contributions to 10 years. Many o f the new benefit structures being proposed to close the coverage gap are also not truly proportional, but replace the current 30 year threshold wi th lower thresholds.
47
105. I t is important to note that the declining total net-cost o f public pension benefits, even with the higher absolute expenditures on the new benefit scheme, i s driven primarily by an increase in contribution revenue as GDP grows. Although in the simulation it i s assumed that covered salaries grow at a slower rate than GDP, there i s also a gradual increase in employment, formal employment, and thus in the share o f contributors to the pension system. This critical assumption is driving the rise in revenues to the pension system from 1.9 percent to 3.8 percent o f GDP.
106. Table 6 shows how the projected costs o f public pensions including the new benefit scheme are affected by changes in some o f the critical variables in the simulation. In the table, an “optimistic” and a “pessimistic” scenario are added to the “complementary” scenario (discussed above). The sensitivity o f the results to changes in assumptions are presented by showing the impact on total fiscal costs o f changes in each variable holding all other variables constant.
Table 6. Sensitivity Analysis of Changes in Simulation Parameters on the Public Pension Deficit (Percentage of GDP)
Contributor Rate Fiscal Result in YO o f GDP 2003 2050 2050
Pesimistic 25% 25% -2.5 Contributors Complementary 25% 50% -0.5
Optimistic 25% 60% 0.4 Annual Growth
Pesimistic 2% -1.4 GDP Complementary 3% -0.5
Optimistic 4% 0.1 Annual Growth
Pesimistic Wages Complementary
2% 2%
-0.8 -0.5
Rate Pesimistic 7% -1.9 Complementary 11% -0.5 Optimistic 16% 1.5
Employer Contributions
Amount DhlP- Complementary $150 -0.5
Amount Complementary $200 -0.5 Optimistic $390 -1
PBU
Source: A16s and MuiAos (2006).
107. For example, in the case o f the share o f workers contributing to the pension system, in the optimistic scenario 6 out o f 10 workers are contributing to the system at the end o f the simulation horizon, and the pension deficit falls to 0.4 percent o f the GDP. However, if current levels o f evasion persist and if at the end o f the period the share o f contributors remains similar to that observed today, the total deficit would increase to 2.5 percent o f GDP. In terms o f macroeconomic parameters, assuming different rates o f
48
economic growth also substantially changes the cost estimate. Assuming a rate o f growth o f 4 percent actually leads to surplus in the pension system, while a 2 percent annual rate o f growth increases the pension’s deficit to 1.4 percent o f GDP. Also shown i s the impact o f a change in the rate o f employer contributions. In that sense, a return to the rates stipulated in the 1993 reform (16 percent o f the payroll) would result in a surplus o f 1.5 percent. However, if the employer contribution rates, which were gradually lowered during the 199Os, were kept l o w (at 7 percent) the simulated pension deficit would grow to 2 percent o f GDP. This analysis demonstrates how sensitive the middle and long-term cost o f public pensions are to even small changes in macroeconomic and system variables. These estimates are similar to past cost estimates o f extending the coverage, although higher given full coverage.
108. As stated above, the motivation for this part o f the analysis is to provide relatively high-cost estimates to encourage further discussion o f options, such as different benefit levels, changes in the retirement age, how benefits are adjusted over time, and targeted (whether to individuals or to households), as wel l as measures to lower costs, improve benefits and increase participation in the contributo system in order to lower the future burden financed directly from general tax revenues. 2 109. Policy makers often hesitate to deploy non-contributory pensions because o f potential moral hazard and high fiscal costs. However, the danger o f moral hazard-that is, that providing a non-contributory benefit for the elderly would eliminate household incentives to contribute to the pension system or to save outside the system- can be lowered by (i) offering a much lower benefit than the average contributory pension; (ii) making the benefit available at a much later age than the retirement age for the contributory pension; and (iii) accurately targeting the benefit to the elderly poor, or making the benefit taxable at source to claw back expenditure from al l but the most needy. The impact o f several o f these options is demonstrated in Table 6 which presents proposals for benefits to cover old age poverty drawn from recent analysis conducted by Wor ld Bank staff and independent specialists.
23 In addition to the higher fiscal costs o f a new lower age at which non-contributory benefits can be accessed (lowered from the current 70 to 65battenuated to a degree by equalizing the retirement ages o f men and women for al l old-age benefits-the simulations are performed in constant 2003 pesos, thus assuming full wage indexing. Given the history o f benefit adjustment, discussed in Part IV, this i s also a conservative, high-cost assumption.
49
B a a d
d d
+ 2
+ B
24
+ % 8 w
s
m
H 0 a
0
2 Yt
110. Table 7 compares the cost estimates prepared using ETEEP data, with alternative fiscal impact assessments o f direct measures to close the coverage gap. The cost estimates o f alternative non-contributory pensions prepared by Bertranou and Grushka (2001) and by Rofman (2003) are particularly illustrative. Although differences in macroeconomic assumptions prevent a direct comparison with the earlier simulation, the relative costs o f different options are striking. Bertranou and Grushka (2001) find that paying universal benefits to al l the elderly regardless o f income or contribution history is about three and a ha l f times more expensive (as a share o f GDP in 2025) than targeting benefits to the elderly poor with no other source o f income. Rofman (2003) estimates that the cost o f a similar universal benefit i s almost twice as expensive as targeting. The age at which benefits are made available also makes a considerable difference to fiscal costs. Rofman (2003) shows that paying universal benefits f rom 75 rather than from 65 cuts costs by more than half. Delaying the age o f payment o f targeted benefits cuts costs by 75 percent.
11 1. An additional factor that wi l l determine the fiscal costs o f a non-contributory benefit that l ie within a Government’s control, i s how the benefit i s indexed, whether to the growth in current wages or to changes in prices. Cost-of-living adjustment (price indexing) i s generally accepted as the best and most financially sustainable option for poverty prevention benefits (broader benefit adjustment policies are discussed in Part IV).
112. The results o f the sensitivity analysis in Table 6 and the additional estimates in Table 7 clearly show the importance not only o f good targeting, but also o f increasing participation in the contributory system to keeping fiscal cost o f non-contributory benefits in a manageable range. Also clear in the cost simulations is the importance o f the success o f the second pillar. And since the simulations presented benefit from exogenously assumed improvements in contribution compliance, the results have to be interpreted and used with caution. Part IV o f this report reviews a number o f challenges for Argentina’s pension institutions which hinder their credibility, and which may be partly responsible for employers, workers and their households turning away from formal coverage.
IIL d. Limited Deployment of Non-Contributory Pensions in Argentina
113. Part I11 o f the report concludes with a detailed look at the non-contributory benefits that Argentina currently deploys, and a discussion o f the evolution, strengths and weaknesses o f these instruments. Argentina has a complex array o f non-contributory pension programs, administered at the Federal and sub-national levels o f government. The Federal program (Pensiones no Contributivas, or PNC) has historically represented about 3 percent o f the consolidated expenditure on social security or 0.2 percent o f the GDP. In March 2004, there were 340,000 beneficiaries, although if health coverage to the dependent household members o f beneficiaries is taken into account this increases to 460,000 people. The average benefit was $198, roughly less than 50 percent o f benefits in the contributory system (Grushka and Bertranou, 2004).
51
114. The National Government’s PNC program includes: targeted social assistance pensions for o ld age, disability, and mothers with seven children or more;24 pensions paid to the veterans o f the Malvinas War; pensions paid to families o f the “disappeared” during the last military regime; pensiones graciables awarded by Congress according to undisclosed criteria; and finally, pensions granted through special legislation (to individuals who have performed non-military national services, such as former presidents, judges who served on Supreme Court, Nobel laureates, Olympic athletes, and so on). All o f the non-contributory pensions paid by the Federal Government are life- time benefits once awarded, except for the graciables, which are granted for 10-year periods. However, most are renewed after the 10 year expiration date.
Figure 18. Argentina’s National Non-Contributory Pension Program
1200
1000
n 800 8
N
f
f 400
m”
B
2
a 600 5
200
0
Program statistics are from March 2004
Average Benefit Amunt 0 Percentage of All Non-Contributory Benefits 0 42
____________________----------------__---------- Average covered monthly earnings in SlJyP
0 24
OM Age hbthers w kh 7 Cisability Matvinas war Rnsiones Pensions Family’s of (targeted) or m r e (targeted) veterans graciables granted by disappeard
(targeted) legislation children special persons
Benefit Cattegory
Source: Bertranou and Grushka (2004).
24 In addition to poverty, the targeting criteria require that beneficiaries (i) not be receiving any other pension benefits or government subsidy; (ii) not be receiving earnings from labor; (iii) be 70 or older for old age benefits, disabled for disability benefits, or the dependents for an absent or unemployed father; and (iv) not have relatives able to provide support. Applicants for the program who were born outside Argentina must prove they have resided in Argentina for a minimum residence period.
52
1 15. As part o f the 1993 reforms non-contributory benefits were strictly separated from the contributory benefits paid by the SIJyP. The program was transferred from ANSeS in January 1996 to what would eventually become today’s Ministry o f Social Development (MDS). Within the Ministry, the National Commission for Social Assistance Pensions (CNPA) i s charged with determining eligibility o f applicants for the targeted non- contributory benefits. They do so by having social workers determine if applicant meets al l the targeting criteria. Once the CNPA determines whether an applicant i s eligible, funds are transferred from the Ministry o f Social Development to ANSeS which actually pays non-contributory benefits through i t s national branch network.
116. In theory, the graciable benefits are also intended to be awarded to vulnerable groups, although as was mentioned already, individual members o f congress determine who receive benefits. The average amount o f these special benefits surpasses that o f the targeted social assistance pensions (Bertranou and Grushka, 2004).
117. Before 2004, and unlike other middle-income countries in the region, non- contributory pension programs in Argentina had not expanded to compensate for the decline in contributory coverage. In 2000 non-contributory pension beneficiaries represented only 0.9 percent o f the total population. In contrast, the recipients o f non- contributory pension benefits in Brazi l (including the nominally contributory but more laxly enforced “rural pensions” regime), Chile, Costa Rica and Uruguay made up between 1.8 percent and 3.5 percent o f the total population. As a share o f al l social security beneficiaries, recipients o f non-contributory pensions represented only about 10 percent in Argentina and Uruguay, 23 percent in Chile, and more than 30 percent in Brazi l and Costa Rica (Bertranou et al., 2004). From 1994 to 2003 the growth o f non- contributory benefits for o ld age and disability was slow and in some years stagnant. The fastest growing non-contributory benefits in the course o f the 1990s were benefits to mothers with 7 or more children and the graciables awarded by Congress (Bertranou and Grushka, 2004).
1 18. Among PNC benefits, the social assistance pensions designed to alleviate poverty are reasonably wel l targeted. The CNPA made considerable efforts in the late 1990s to improve targeting. Analyzing the incidence o f non-contributory benefits by geographical area, income and other welfare measures, Bertranou and Grushka (2004) found that receipt o f the targeted social assistance benefits was highly correlated with poverty and non-income measures o f deprivation. They also found that targeted benefits lowered poverty levels among beneficiary households by as much as 20 percentage points. However, when graciables were included in the analysis, targeting performance worsened considerably.
119. Recent changes to the nature o f non-contributory pensions have increased their deployment. Until 2004, the targeted non-contributory pensions (old age, disability, and mothers with 7 or more children) were rationed. There was a “ 1 for 1” rule, under which new benefits were granted only if a current recipient passed away or became otherwise ineligible. Social assistance pensions are similarly rationed in Chile. The Federal
53
Government l i f ted this ration with an emergency decree in August 2003, creating a universal right to a non-contributory pension for those who meet the targeting criteria.25 The decree represents a fundamental change in the nature o f the program, which would no longer be just a social assistance benefit, and with the elimination o f the ration, became a right for households and a contingent l iabi l i ty for the Government.
120. Unl ike the Federal PNC, Plan Mayores (initiated in 2002 in response to the crisis and at about the same time as the deployment o f the Heads o f Household work-fare program) i s intended as a transitory, temporary, emergency program. However, there are a large number o f elderly in Plan Mayores who qualify for permanent social assistance pensions. Beneficiaries o f Plan Mayores are being slowly folded into the PNC program, through a gradual process o f determining case by case, which meet the targeting criteria. Those that don’t meet these criteria, lose their benefit. Those that meet the criteria j o in the ranks o f PNC benefits.
121. With the elimination o f the ration on targeted non-contributory pensions, the CNPA’s work load increased exponentially. At the start o f 2004, the CNPA held 110,000 benefit applications that had not yet been processed; over 62,000 beneficiaries o f Plan Mayores to review; a substantially increased budget to execute; but l imited technical capacity and an institutional culture o f first denying benefits. In the course o f the year, the CNPA reviewed over 1 18,000 applications and awarded almost 84,000 new benefits. The bulk o f new benefits were awarded from June 2004. About 10,000 o f the 62,000 beneficiaries o f the temporary Plan Mayores have been awarded permanent non- contributory pensions (MDS, 2004).
122. At the close o f 2004, 62 percent o f non-contributory benefits paid by the Federal Government were targeted social assistance benefits (37 percent were the “graciable” pensions awarded by Congress and 1 percent were “special law” pensions). This i s a clear improvement since the year 2000 when only 47 percent o f non-contributory benefits were targeted benefits (and when graciable pensions were the largest category o f non- contributory pensions, at 49 percent o f benefits, see Grushka and Bertranou, 2002). Compared with the prior year, the fastest growth in targeted benefits in 2004 was observed in the number o f new targeted disability benefits, followed by new targeted old- age benefits. Today, targeted disability benefits are the largest benefit category (MDS, 2004).
25 Decree 582, signed August 14, 2003.
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Part IV. Principal Challenges for Social Security and Private Pensions in Argentina
123. In the midst o f a long economic recession in the late 1990s and the fiscal crisis that flared in early 2001, the National Government pursued a number o f emergency policies to cope with the pressures o f an over-valued currency, mounting debt, and disintegrating investor confidence. The Government’s attempts to cope with the crisis have had a direct impact on Argentina’s social security system by altering the value o f current benefits, lowering contribution rates, and changing the investment rules for the commercial pension fund managers (Rohan , 2003). Whi le many o f the system’s structures required reform (see ILO, 2002a’ by and cy MTEySS, 2003 and 2005)’ the actions taken by the authorities in the wake o f the crisis were ad-hoc and generally by presidential decree, rather than by legislation, which would have required a fuller discussion between government, legislators and other stakeholders (Bertranou, R o h a n and Grushka, 2003).
124. The Government’s expediency during the crisis i s an important factor to take into account as future changes are considered, since the lack o f explicit support in Congress for many o f the measures taken might wel l have hurt the SIJyP’s credibility in the public eye. The SIJyP as wel l as other formal retirement income security systems in Argentina are suffering from a crisis o f confidence. There has long been popular skepticism o f public pension plans, the AFJP, and private insurance providers. Events during and in the wake o f the crisis heightened this skepticism and may have helped to drive households to informal forms o f saving and investment for o ld age, or given them reasons not to return to formal social security cover.
125. Each o f the fol lowing sections discusses a particular aspect o f the SIJyP specifically and o f Argentina’s old-age income security institutions in general. The common factor i s that these issues are l ikely to lower the credibility o f the system, raising the real and perceived costs o f participating and lowering the real and perceived benefits o f coverage. As shown in the previous section, surmounting this credibility problem and increasing participation i s critical to the government’s ability to offer expanded forms o f social assistance and improved incentives through more proportional contribution requirements.
IKa. Adequacy of the Commercial Second Pillar: Portfolio Risk, Contribution Rate and the Cost of Insurance
126. The principal pending problems in the commercial branch o f the SIJyP second pillar have to do with: remaining portfolio risk even after Argentina’s debt settlement; the l ow contribution rate made by affiliates since November 2001; and the cost o f disability and l i fe insurance. These problems are grouped together as they are closely inter-related, and joint ly weaken the capability o f Argentina’s commercial second pillar to act as an adequate consumption smoothing instrument.
55
127. In the midst o f the recession and fiscal crisis in 2001, the AFJP were allowed to increase their holdings o f government bonds above the previous portfolio limit o f 50 percent. Toward the end o f 2001, the government executed a swap o f bonds held by al l domestic investors, mostly banks and AFJP pension funds. In exchange for the old bonds which had a market value and were regularly traded on the local stock market and bourses abroad, the new debt instruments were issued in dollars at an annual rate o f 7 percent and backed by “guaranteed loans”. These new instruments had a lower interest rate and no secondary market. Although the swap was strictly speaking voluntary, the government exerted strong pressure on the fund managers to accept the swap. Shortly after the first swap the government ordered that al l pension assets invested in CDs be applied to buy treasury bills directly f rom the government.
128. In the wake o f Argentina’s peso devaluation, in March 2002 the debt instruments backed with guaranteed loans-still denominated in U S dollars-were converted to pesos, at an exchange rate o f 1.4 pesos per dollar. However, most fund managers retained the right to the dollar denominated bonds. These new loans are indexed to inflation and receive an annual interest rate between 3 and 5.5 percent. Those fund managers that did not convert their bonds to pesos hence had to j o i n the rest o f Argentina’s creditors in negotiating the default settlement. In October 2004, the Government reached an agreement on a final bond swap with the fund managers that translated to a hair cut o f 30 percent with respect to the original dollar value o f the debt. As discussed below, the valuation o f government debt st i l l held in the portfolios o f the AFJP has had a direct impact not only on the returns earned by affiliates but also on the cost that they pay for services bundled with the commercial second pillar.
129. A core issue that remains after the debt settlement i s the degree o f diversification o f AFJP portfolios with a concentration in public debt instruments. In September 2005, the average portfolio distribution for the fund management industry was roughly 60 percent in public debt securities, 16.5 percent in private securities, 5.7 percent in fixed term deposits, and just over 10 percent in foreign assets (with the remainder in other instruments).
130. The concentration o f AFJP portfolios in public debt is not the highest among commercial second pillars in the region. In fact Argentina ranks in the sixth highest position among 13 systems operating in Latin America and Central-Eastern Europe. However, three factors make such concentration stand out: (i) a high concentration in government securities i s often observed in the first few years o f a commercial system’s operation, but the AFJP branch, while young by pension system standards, i s older than several others in the region where allocations to public securities i s not as high; (ii) there i s no “floor” on the allocation to public bonds in the investment regulation o f the AFJP (as there i s in Uruguay and Mexico) that would explain the high share o f government debt in pension fund portfolios; and (iii) Argentina’s public bonds are not “risk-free” assets.
56
Table 8. Portfolio Allocations in Mandatory Commercial Second Pillars Pension Plans in Latin America and Eastern Europe
(% of Total Funds, June 2005)
State Corporate Financial Foreign Other Total Sector Sector Sector Sector Assets Investment
Argentina Bolivia
Colombia Costa Rica Chile
El Salvador Mexico
Peru
D.R. Uruguay Bulgaria
Kazakhstan Poland
60.59
67.50 47.46 72.98
18.08 83.28 82.91 23.16
0.00 80.22
54.02 50.60 63.09
15.03
24.40 20.57 10.39
24.84 0.32
12.24 43.68
0.00 4.25 4.49
30.40 30.05
13.05
5.60 20.06 16.28
29.02 10.18 1.66
22.69
100.00 5.55
33.96
9.00 3.74
9.87 1 s o
11.77
0.35 27.95
6.21
0.00 9.57 0.00 0.00 0.00 7.20 2.01
1.46 1.10 0.00 0.00 0.12 0.00 2.34
0.89 0.00 9.98
0.00 2.80 0.25
100.00
100.10 99.86
100.00
100.01 99.99 99.15
99.99 100.00 100.00
92.47 100.00 99.14
Source: International Federation o f Pension Fund Managers (FIAP), www.f ia tx i
13 1. A high concentration o f pension fund portfolios in public fixed-income securities could over-expose workers retirement savings to political r isks o f such instruments-a key motivation for turning to the commercial sector to manage pension funds in the first place (World Bank, 1994, Gill et al., 2004). Some Lat in American countries that introduced commercial second pillars have forced these to invest in government debt as a matter o f pol icy and a way o f bridging the costs o f transition from single pillar to a mature multi-pillar system. However, where there has been l i t t le decline in the share o f portfolios invested in bonds over time, and only minor investment in the real economy, observers have begun to question whether commercialization i s bringing about any benefits. For this reason diversification o f AFJP holdings would be advisable. Furthermore, since Argentina’s economy has long been in need o f more infrastructure and capital investment, the opportunity cost o f the current concentration o f AFJP portfolios in government debt i s l ikely considerable.
132. Lowered worker contributions to the AFJP individual accounts risk the adequacy of the commercial second pillar in terms o f the pensions i t can yield. As a measure to stoke aggregate demand toward the end o f 2001, the authorities lowered the statutory employee contribution for affiliates o f the commercial branch o f the SIJyP second pillar from 11 percent to 5 percent. The decree passed to lower contributions was renewed in November 2002 as there was little political support to raise the AFJP contribution rate
57
back to i t s original level. The contribution rate was again due to be restored to the original 11 percent in 2003, but was only raised to 7 percent, where it remains.
133. At a 7 percent contribution rate, the expected benefits o f AFJP affiliates i s inadequate, as almost ha l f o f workers mandated contributions pay for management and insurance fees leaving very l i t t le to accumulate for retirement. Four years have passed since the contribution rate was lowered. However, there is st i l l l i t t l e support to restore the rate despite the strong economic recovery Argentina has enjoyed since 2003, and the issue is nested within a larger, unresolved question o f how disability and l i f e insurance should be provided in the future.
134. As in most Lat in American countries that adopted the multi-pillar pension model, coverage o f the losses from disability and the death o f affiliated income earners in Argentina-which were once offered by purely public social security plans prior to reforms-was partly privatized in 1993. When affiliates o f the SIJyP choose between the system’s defined-contribution (AFJP/JO) and defined-benefit (RPP/PAP) second pillar plans for the earnings-related portion o f their retirement pension, they are also choosing between commercial or government provided disability and l i fe insurance. As the share o f affiliates in the RPP has fallen, so has public provision o f disability and l i fe cover in the national system relative to privately provided cover. The only countries in Lat in America with individual retirement accounts-either mandatory or voluntary-that retain public disability and l i fe insurance are Mexico and Colombia.
135. Price stability in the 1990s and the inroads made by large international insurance companies provided a strong foundation for the development o f private insurance and contractual savings. From 1994, as each new wave o f affiliates entered the AFJP branch o f the SIJyP second pillar, Argentina’s insurance industry grew rapidly. However, regulatory changes since 1994, the financial crisis, and events since have left the insurance industry weakened. Lack o f confidence in the sector, over-investment in government securities, a lack o f transparency, and regulatory weakness combined to weaken the industry. Measured in per-capita spending on premiums, the insurance industry in Argentina i s slightly larger than in most Latin American countries, although s t i l l relatively small when compared to the industries in the United States, Japan and most European countries.26 The health o f the insurance industry i s important to the credibility o f the SIJyP since it impacts directly on the level o f retirement income o f AFJP affiliates.
136. The price o f insurance has a more direct impact on retirement income in Argentina than in other private second pillar pension plans. The law mandates a total contribution rate to the funded system that bundles together retirement savings, fund
26 An alternative measure o f the size o f the insurance industry i s spending on premiums as a percentage o f GDP. By this measure, the insurance industry in Argentina at 2.5 percent o f GDP is significantly smaller than the industry in Chile (4 percent), Panama (3.6 percent) and the average for emerging market countries (3.7 percent). The average size o f the industry in premiums as a percentage o f GDP among OECD countries i s 9.2 percent (See Savage in CEF, 2004).
58
management fees, and the premiums and fees for insurance. Whi le in Chile the law stipulates that 10 percent o f affiliates’ earnings accumulate in their individual retirement accounts and fund management and insurance fees are defined as separate, additional charges (although also as a percentage o f earnings as wel l as flat fees), in Argentina fees for fund management and insurance are financed out o f the total defined contribution made by workers. Thus when fees for fund management and insurance increase, less o f an affiliate’s total contribution accumulates as savings for o ld age. This trade-off between the defined-contribution and defined-benefit elements o f the commercial second pillar does not exist in systems l ike Chile’s, where the contribution for o ld age i s defined separately.
Table 9. Fund Management and Insurance Fees in Lat in America’s Commercial Second Pillars, June 2004
Insurance
Insurance Fund Individual Costs as Percentage
Of Total Individual
Insurance Costs as
of Net
Savings
Total Fees Premia and Management Savings Net Percentage Fees Fees of Fees
Fees
Argentina at current 7% 2.90 1.41”) 1 S O 4.10 48.62 34.39 at original
11% 3.42 1.48 1.94 7.58 43.27 19.53 Bolivia 2.21 1.71 0.50 10.00 77.38 17.10 Chile 2.27 0.71 1.56 10.00 3 1.28 7.10 El Salvador 2.98 1.28 1.70 10.02 42.95 12.77 Mexico@ 3.96 2.50 1.46 7.04 63.13 35.51 PWd 3.19 0.92 2.27 8.00 28.84 11.50
Uruguay 2.89 0.89 2.00 12.1 1 30.80 7.35 Source: Baer (2005) Notes (a) Mexico’s mandatory disability and survivor cover are s t i l l provided by a publicly administered social insurance institution and thus not strictly comparable with commercially provided insurance. (b) The average cost o f insurance was 1.27% in June 2005.
137. Measured as a share o f affiliates’ contributions accumulating as retirement savings, the price o f insurance in Argentina’s commercial second pillar i s among the highest in Latin America.27 Although in the mid 1990s the average premium was substantially lower than i t s current level and was considered competitive by regional standards, several regulatory, industrial and political factors contribute to high costs (CEF, 2004).
27 By this measure, fees are higher in Mexico. However, as centralized publ ic ly provided insurance, costs in Mex ico are not strictly comparable to those in other countries with a commercially administered second pillar.
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138. In terms o f regulation, changes since 1994 have raised the cost o f provision. Through successive changes in regulation, the government increased the disability and l i fe insurance benefits that the insurers are required to offer.28 The time period for which covered households can claim benefits, was repeatedly altered and may have l i t t le relation to the point in time the covered death or disability actually took place.29 Eligibility criteria have been made more generous than in similar systems el~ewhere.~' And rules were established that index insured capital to share value, resulting in benefits that largely exceed the statutory benefits.
139. In terms o f industry structure, the insurance companies had a history o f accumulating excess reserves and there i s growing concern for the lack o f competition in the sector. As elsewhere in the region, the AFJP are each required to contract collective disability and l i fe insurance policies to cover their affiliates. Argentina has long required AFJP to auction disability and l i fe cover for their affiliates to private providers. Argentina's insurance sector has a greater number o f insurance providers catering to the commercial second pi l lar than in similar systems elsewhere. Yet while auctioning requirements were introduced recently in Peru (2003) and have had a substantial downward impact o n insurance prices, there i s very little difference in prices or services between insurance providers in Argentina. This outcome might be explained by the very close relationship between AFJP and insurers: the auctioning process lacks transparency
** In 1996 the definition o f survivor benefits was altered by regulation in such a way as to recognize the composition o f the beneficiary household at the moment o f each payment, rather than the number o f dependents that existed at the time o f an affiliate's death. This change mainly affects payments to widows with dependent children-when the children are no longer o f dependent age (turn 18) the amount they were receiving from the pol icy i s added to what the widow continues to receive. This change immediately increased the insurance benefits covered households were eligible to receive, raised insurance pay-outs, and consequently led to a rise in premiums and fees. In 2003, this change in the definition o f benefits was made retroactive to the launch o f the system in 1994. Further, the change stipulated that closed cases, in which beneficiaries were no longer receiving payment, could be re-opened and insurance companies required to pay the difference between what the beneficiary actually received and what the new retroactive benefit definition implied. 29 Since 2001 regulators extended the period in which a claim can be made to the l i fe o f the policy rather than some more predictable period after the covered event, making i t very difficult for insurers to calculate the appropriate level o f reserves (Baer, 2005). Unlike other private insurance policies, mandated private l i f e and disability insurance providers have to keep a larger share o f reserves. This i s because, while wi th most private policies claims are made immediately or shortly after the pol icy holder suffers the insured event there can be a considerable delay between the event and presentation o f the claim by affiliates to the private mandatory savings pillar o f a multi-pillar pension system. There are two common explanations for these delays: (i) there i s a lack o f information among households about their mandated coverage, that can lead to lags between the time an insured event occurs and when the individual or household members acquire information about the existence o f the policy and how to make a claim (e.g., if an affiliate dies, a spouse or dependents may not know to which AFP he i s affiliated or whether they are even covered and with what insurance); and (ii) in the case o f disability insurance, in Argentina, delays arise from the '' In 1997 and again in 1999 the eligibility criteria for disability and survivors insurance were loosened largely in response to high unemployment, but at a high cost o f the insurance industry (Baer, 2005, ILO, 2006).
rocess o f determining whether a disability i s permanent or just temporary, and the degree o f disability.
60
and regulation, which allows most fund managers to simply contract insurance with a provider in their same financial group. The close relationship may reveal a risk- management strategy in an uncertain market, but also hinders the benefits o f open competition on the price o f insurance paid by affiliates (CEF, 2003 and 2004, Baer, 2005).
140. Finally, in terms o f pol icy factors, the SIJyP structure with parallel public and commercial second pillars creates a disconnect between defined benefit insurance for disability and survivors, from the public defined benefit plan for old age (the PAP). The performance and criteria applied by medical commissions responsible for determining eligibility for disability benefits impose costs. And transparent benefit indexation rules are lacking. Furthermore, the Government's lowering worker contribution rates to the AFJP in 2001 from the original 11 percent to 5 percent, automatically increased the weight o f fees as a share o f retirement savings accumulating in affiliates' accounts. N e w stipulations for how claims could be made and reserve requirements led to a fal l in the cost o f insurance, this proved only t e m p ~ r a r y . ~ ' Further, as insurance benefits are indexed to the real return, the share value o f AFJP funds, and average account balance, the manner in which pre-crisis securities in the AFJP portfolios were valued in the wake o f the default and debt settlement has had a direct impact on insurance fees.32
141. In summary, the average cost o f insurance has increased considerably. As a result o f changes in market regulation and pol icy uncertainty before and since the 2001-2002 crisis, few insurers are holding adequate reserves. None are covered by reinsurance providers. Claims from contingencies in a given year are paid f rom the premiums collected in the same year, creating a scheme that resembles a private PAYGO arrangement among covered workers. In the absence o f reinsurance, if in a given year a large number o f claims are made and payment i s granted, this raises the insurance premiums that al l affiliates have to pay, since, al l else equal and assuming healthy competition-which, as mentioned previously, i s lacking in Argentina's insurance sector-a larger number o f participants in a risk pool will translate to lower premiums. Given the relatively small size o f the risk-pool-which without reinsurance i s reduced to the affiliates o f a particular AFJP-this is an inefficient form o f risk pool ing that may also help maintain high insurance fees. However, the importance o f the current size o f insurance risk-pools in determining the premia and fees paid by AFJP affiliates-relative to the long l i s t o f regulatory, industrial and political factors above-is s t i l l debated.
3' When the government reduced contributions from 11 percent to 5 percent to encourage domestic aggregate demand, i t also generated a transitory decline in the cost o f insurance as well as AFJP commissions. This was achieved by reducing reserve requirement for insurance companies by switching claims from accrued to cash basis. Although insurance companies were s t i l l holding reserves at the time, when this change was made no further accumulation was necessary. Thus, although the cost o f insurance declined, costs increased again once reserves were exhausted. 32 This said the impact o f the default and portfolio valuations on insurance costs have to be considered in light o f the much faster growth in the assets held by insurance companies than o f those held by the AFJPs.
61
' s insurance provid are also amrrng the t
Pension Income as P Multripie of Line
1.7
e or
Figure 20, C in Selected Indices and Public Pcnsions, 2001 - 2004
105 3
T#day, #E legal action
me and social security ~ n s t ~ ~ u t ~ ~ n s in
r e t ~ ~ ~ ~ ~ ~ ~ i t age, benefit levels and average repla workers in ~ ~ ~ n ~ c i ~ a l g ~ ~ ' ~ ~ ~ ~ ~ ~ t ~ 14 plans for p r o ~ ~ i n ~ ~ ~ ~ civ i l servants, 77 p ~ ~ ~ e ~ s i o ~ ~ 1 plans, and several others. The ~ a r ~ ~ e ~ e r ~ o f these plans tend to be far more ~~~~~~~s than those o f the n a ~ l ~ n ~ ~ system. Figure 21 shows the r ~ t ~ r e m e ~ ~ t age aatd a ~ ~ e r ~ ~ e benefit a ~ o ~ ~ ~ t reported by ETEEP ~ e ~ ~ o n d ~ ~ t s who retired under ~ ~ f f e ~ e ~ ~ ~ p ~ ~ t s i ~ ~ ~ plans,
69 I
Executive branch, teqlslative AWES, AFJPcIF Provrnciat System Nalianat ar branch, National other R.ovinctal or Ravincial
m psnsian incorn .I age of rettremnt
$604
Special Regtme
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Box 6. Benefit Adjustment Policies around the World
Indexation o f benefits i s a standard feature o f public pension systems in most developed countries as a means o f meeting the “income adequacy” objective o f social security policy. Formulas for indexing pension benefits have a powerful impact on total pension expenditures and consequently on the long-term financial sustainability o f a pension system. Price-indexing entails increasing retirement benefits in line with consumer prices in order to protect their purchasing power, while wage indexing involves increasing retirement benefits in l ine wi th wages in order to preserve the portion o f wages they replace when those covered are no longer able to work. Over time, wages are l ikely to grow faster than prices, making wage-indexation a relatively costly option for most countries. Motivated by growing public pension liabilities, most countries in the OECD have implemented changes in indexation formulas, involving in al l cases a move from wage- to price-indexation or to a mixed formula. These changes have been introduced as part o f a more comprehensive effort to improve the long-run financial viability o f their pension systems. In the sample o f countries shown in Table 6.1, only Slovenia still maintains full wage indexation. Germany used to have a wage indexation formula but it has had no indexation at a l l for the past two years due to fiscal pressures and has declared a continuation o f i t s no indexation for the next three years.
-
Table 6.1. Indexation Rules for Public Pension Benefits in Selected OECD Countries
Countrv Indexation Austria Belgium Czech Republic France Germany Net wage indexation Hungary Italy Latvia Price indexation Portugal Price indexation Slovenia Net wage indexation Spain Sweden Price indexation Switzerland United Kingdom Price indexation United States Price indexation
De facto combination of prices and wages Price indexation for public scheme Roughly equivalent to 70 percent prices and 30 percent wages Price indexation for public scheme since 1993
50 percent prices and 50 percent wages Price indexation for public scheme since 1993
Price and wage indexation (only price indexation in 1996)
50 percent prices and 50 percent wages
Belgium changed i ts indexation from wages to prices in 1976. France made a similar shift in 1993. 1tr.j abolished wage indexation in favor o f price indexation in 1993. In 1996, Poland also adopted price indexation as part o f the f r s t phase o f i t s pension reform, although some discretion for higher increases i s allowed. In Latvia, the reform o f the pay-as-you-go scheme also included a shift to price indexation. Rather than switching fully from wages to prices, a number o f countries have introduced mixed formulas for the adjustment o f benefits. In Hungary, pension benefits were indexed to annual changes in net wages until 1997. As part o f the pension reform passed in 1997, Hungary shifted to a mixed formula involving a combination o f wages and prices wi th equal weights similar to the formula applied in Switzerland. Trade unions and government in Finland negotiated a new indexation formula in 1995. In the recent debate on social security reform in the US, benefit indexation was raised as a key parameter for reform in order to contain the expected liabilities o f the US system. According to the current law, after retirement, social security benefits are indexed to prices through annual cost-of-living adjustments (COLAS). But at the time o f retirement, workers‘ initial benefits are set by adjusting their average career earnings by average wage growth over their working lives. Some reform proposals would introduce “progressive indexing”, or the continuation o f wage indexing for al l workers with low average career earnings, and price indexing for those with higher average career earnings.
We are grateful to Montserrat Pallares (Social Protection, World Bank) for contributing this box.
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147. The problems this multiplicity poses to the functioning and over-all credibility o f Argentina’s social security institutions have less to do with the number o f plans per se, but arise from their “substitutive” (as opposed to “complementary”) character. There are numerous pension plans operating in the U S A and other OECD countries, but all legal workers in the United States pay contributions to the social security system. Among large companies in Brazil’s private sector, i t i s common for workers to be offered a company pension plan. However, the plan i s designed to complement the pension they receive from the Regime Geral, the public pension system for private-sector workers, and contribution to the company plan does not exempt workers from participation in the national public system (see Gill, Packard, Schwarz and Yermo, 2001).
148. In contrast, an affiliate in one o f Argentina’s sub-national or professional pension plans is exempt f rom contribution to the national SIJyP. In the case o f separate plans for the police, military and federal judges, this substitution i s by design and was part o f the overall social security strategy conceived in the 1990s. In the case o f the police and the armed forces-workers exposed to very particular risks and who typically have a very different employment and retirement prof i le than that o f the general pub l i c i t he re are theoretical arguments for keeping separate systems. However, in the case o f the sub- national and professional pension the multiplicity o f substitutive pension plans i s a potentially costly legacy.
149. As mentioned previously, in 1994 and 1996 selected pension plans for sub- national c iv i l servants were integrated with the SIJyP. Provinces that chose to integrate their plans were required to relinquish their right to provide pensions. Once integrated, the pensions already granted by these plans were paid by the SIJyP, through direct transfers from the national budget to ANSeS, while provincial and municipal employees were required to choose between the RPP/PAP and the AFJP/JO as new affiliates to the national system. However, this integration process stopped in 1998. Two years later, as part o f a coparticipacibn negotiation, an ambiguous pol icy o f “harmonization” o f the parameters o f provincial and municipal plans with those o f the SIJyP was installed, accompanied by a transfer o f funds from the National Government to certain provinces.
150. The separate pension plans for sub-national c iv i l servants have posed a risk to the provincial and national fiscal stance (World Bank, 1998), and are used an important factor in the re-negotiations o f Argentina’s complex system o f federal public finances and they hinder substantive discussions o f national social security reform (see Box 7).
15 1. The professional pension plans, while conceived and sanctioned by law, operate independently and without supervision or regulation. Data with which to assess the actuarial viability o f the professional plans i s scarce. The actuarial studies o f the plans that do exist show few long-term problems; the plans are said to have adequate reserves; and their administrators have changed contribution and benefit parameters at various points, presumably in order to maintain their financial solvency. However, their financial health has not been subject to independent verification. Although there is no record o f a professional plan going bankrupt and requiring a government bail-out, the difficult situation o f similar plans in Paraguay and Uruguay stress the importance o f financial supervision.
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152. The multiplicity o f substitutive pension plans has a negative impact on equity and efficiency, for several reasons. First, fragmentation o f old-age income and broader social insurance provision hinders the quality and efficiency o f risk-pools. The structures for old-age, survivor and disability insurance are not operating under a coordinated framework, they do not offer a uniform minimum package o f cover, and they are not backed by risk-transfer mechanisms. Second, by limiting the size o f any particular r isk pool or affiliated group, this fragmentation prevents the full exploitation o f economies o f scale to lower administrative costs. Third, differences in eligibility criteria and plan structure can create difficulties for recognition o f acquired r ights and the portability o f benefits between plans, which can create disincentives to the movement o f labor (although the national authorities have made much progress in establishing reciprocal recognition o f rights and benefits over the years, making this less o f a problem than it has been in the past). And finally, wide variation in plan parameters -such as benefit levels, contribution rates, and benefit adjustment- can lead to inequitable outcomes, often subsidized directly by local, provincial and the national government at the expense o f more targeted uses o f public resources.
I K d . SIJyP Regime Choice and the Competing Second Pillars
153. The choice between the public and commercially administered branches o f the SIJyP second pi l lar also poses challenges. The choice between a public and commercial earnings-related plan in the national system was a substantive concession in the negotiations to secure passage o f the 1993 reform. Although similar choices are offered elsewhere in the region (Peru and Colombia) and beyond (Hungary and the United Kingdom), where choice exists, can lead to complications and increases administrative and transactions costs.
154. In Argentina, the share o f affiliates and contributors to the commercial branch o f the SIJyP has been rising steadily, and i s l ikely to rise even further or remain relatively higher than the share o f affiliates in the public branch. This i s largely due to the one-way design o f the second-pillar choice: if an affiliate to the SIJyP chooses the RPP/PAP he can change his mind at any later point and switch to AFJP/JO, but once the affiliate chooses the commercial branch whether upon entering formal employment for the f i rst t ime or leaving the public branch, the RPP/PAP i s no longer an option. Furthermore, if affiliates do not make an explicit choice, they are assigned to the commercial pillar by default. T h i s feature i s similar to the choices offered to formal workers in Peru’s multi- pillar system, and has been used to phase out public earnings-related plans elsewhere in the region. Administrative data show that between 1994 and 2004 the majority o f SIJyP affiliates were thus assigned to the AFJP branch.
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Box 7. Fiscal Federalism, Public Finance and Social Security
Public expenditure in Argentina i s highly decentralized. Although there are several countries in Latin America with strong federal traditions, political and economic structures (e.g., Brazil, Mexico), throughout the 199Os, a larger share o f spending was conducted by sub-national governments in Argentina than in any other country in the region (World Bank, 1996). Argentina's fiscal federalism has a direct impact on the social sectors. The provision o f education and health services are largely assigned to provincial governments, and although social protection policies and programs (social security and increasingly social assistance) are conceived and administered at the national level, spending at the provincial level has a direct baring on the design and financing o f national policies and programs.
In stark contrast to public spending, the public finance system i s dominated by federal taxes, including a national value added tax (VAT), pay-roll contributions for social security, income tax, excises, and levies on trade. Provincial governments collect only a small fraction o f total tax revenues, mainly through sales taxes, property taxes, and stamp duties. The national government collects about 75 percent o f al l tax revenue; provincial governments collect about 22 percent; and the remainder i s collected by municipal governments.
The national and provincial governments have sought to correct the imbalance between public expenditure and public finance in Argentina's fiscal federalism, using complex transfer arrangements that channel roughly 6 percent o f GDP in national resources to the provinces and about 1 percent o f GDP to municipal governments every year. By far the dominant instrument in these arrangements i s the "Coparticipaci6n" (revenue sharing) rule, which distributes national revenues between the national government, the social security system, and provincial governments. Most o f Argentina's tax bases (and tax instruments) are subject to the revenue sharing rule, except for trade tariffs, pay-roll contributions for social security, and a l e v y on insurance premia. In addition to the revenue sharing rule, taxes collected by the national government are channeled to the provinces through a number o f "Funds" (e.g., the Rural Electrification Fund; the Tariff Compensation Fund; and the National Housing Fund to name a few) and conditional (i.e., "earmarked") transfers. Further, an annual transfer from VAT and the federal income tax i s set aside to be distributed between the provinces and the social security system to help cover the cost o f retirement pensions, survivor benefits and other social insurance payments.
This system o f revenue sharing and fiscal transfers between the national and provincial governments-which was established shortly after the return to democracy in the mid-l980s, but reflects a longer, similar tradition o f federalism-was originally intended to be only temporary. The 1997 deadline for reform and the establishment o f a permanent system o f fiscal federalism was largely ignored, and has received only ad-hoc attention in the policy agenda since the 2001-2002 financial crisis. This i s mainly due to the difficult political factors that prevented the establishment o f a permanent system o f fiscal federalism in the first place (Cuevas, 2003).
The complex arrangements lead to several complications for the overall economy. The assignment o f tax- collection to the National Government and spending to the provincial governments counteracts national adjustment efforts. The nature by which the "primary" distribution (Le., from Nation to Provinces) i s determined can leave structural reforms needed at the national level influenced by provincial governments, to the extent that these reforms would require changes to the tax system, and thus by extension, changes to revenue sharing. Thus policy makers can be constrained in their reform options to the extent that these imply a change to either the primary or the secondary revenue distribution. In social security specifically, Argentina's fiscal federalism has had considerable impact. Since the consolidation and structural reform o f the national pension system, sub-national pension regimes have remained an important issue. The special regimes have amassed high unfunded liabilities. How to distribute the burden o f these liabilities and the r isks that they present between the National and Provincial governments i s a challenge that has dominated every renegotiation o f the federal fiscal pact since 1992.
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Figure 22. ~ ~ c o ~ ~ - ~ i l ~ a ~ Choices of New Affiliates to the SIJyP, 1994 - 2004
I 80%
70%
60%
o Undecided
Q RPPiPAP
& AFJWJO
1995 1996 1997 1998 1999 2000 2001 2002 2003 200.1"
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157. A r e ~ a ~ ~ j ~ ~ eh. the public and eo y adinin chcs o f the ~~~y~ second pillar poses several c h a ~ ~ e ~ ~ e s , First, the ~ r ~ n s a c ~ i o n s costs o f
costs for fixture tax-payers.
ution of SIJyP Mfili rE, 2004
w P.W?PAP rb AFJWSO
65 ~ 69
60 f 64
55 - 59
50 * 54
45 - 49
$ 35 - 39
8 68
30 - 34
25 - 29
I
20 " 24
Under 20
0 10 20 30 40 XI so 70 80 90 300
Percentage of SlJyP Affiliates
158. Today, there are ~ ~ ~ d e ~ ~ r e a d ca31s to allow A F ~ P ~ ~ 3 ~ ~ ~ e s to return to the public ~ r ~ n c ~ o f the second pillar if they SQ ~hoctse. Given thc low share o f ~ f ~ ~ ~ n ~ e r a ~ ~ l i ~ ~ c ~ who opt for the RPPPAP (see Figure 231, actual switches might not be that ~ ~ ~ e r ~ u s . Where a ~ ~ ~ ~ d ~ c choice to switch has been offered, i t has tended to lead tu u ~ ~ e ~ ~ i n ~ ~ in c a l c ~ ~ ~ ~ i ~ ~ ~ public ~ e n s i o ~ i ~ ~ a b i l ~ t i e ~ . Also, adverse selection, "'risk ~~~~~~~~~~, and strategic g a ~ ~ n ~ to capture public p e ~ s ~ ~ n subsidies would need to bc taken into a c c o ~ ~ t .
Finally, better-off, informed affiliates are more l ikely to benefit from regular option to switch than those lower income workers.
IKe. Remaining Vulnerability to Demographic Changes
159. The 1993 reform l i f ted the retirement age for men and women affiliated to the SIJyP from 60 to 65 and from 55 to 60, r e ~ p e c t i v e l y . ~ ~ Although this change placed the minimum ages o f retirement in Argentina closer to the average in OECD countries- indeed, on the higher end o f the observed range for men-the SIJyP and other pension plans in the country remain vulnerable to demographic risk.
Table 10. Minimum Retirement Ages and Li fe Expectancy for M e n and Women, Selected L a t i n American and OECD Countries, circa 2000
Men Women L i fe Difference Life Difference
Retirement Expectancy from Retirement Expectancy from Age at Retirement Average Age at Retirement Average
Argentina 65 14.4 -1.3 60 22.0 1.3
Australia 65 16.3 0.5 65 22.5 1.8
Brazil 54 20.2 4.4 52 26.0 5.3
Chile
Colombia
Ecuador
France
Germany
Greece
Italy
Japan
65 14.9 -0.8 60 17.8 -2.9
60 18.4 2.6 55 25.4 4.7
55 20.1 4.3 55 22.8 2.1
60 19.7 4.0 60 25.0 4.4
65 16.3 0.5 65 20.5 -0.2
65 16.2 0.4 60 23.2 2.5
65 15.5 -0.3 60 23.9 3.3
65 17.0 1.2 65 21.7 1 .o Mexico 65 16.0 0.2 65 17.9 -2.8
New Zealand 65 15.6 -0.2 65 19.2 -1.5
Portugal 65 14.4 -1.4 65 17.9 -2.8
Spain 65 16.0 0.3 65 20.0 -0.7
United Kingdom 65 15.1 -0.7 60 22.6 1.9
USA
Uruguay
65 15.7 -0.1 65 19.4 -1.3
60 17.5 1.8 58 23.3 2.6
Venezuela 60 17.9 2.1 55 24.1 3.4 Average 63.8 15.8 62.7 20.7
1. Brazil does not have a statutory minimum retirement age. The ages shown are taken from average age o f retirement from RGPS - Length o f Service program.
Source: Palacios and Pallares (2000).
33 Women can receive benefits and continue to work formally unti l the age o f 65. From 65 they can no longer be legally working and receiving public pension benefits. If by the age o f 60 an affiliated woman cannot yet claim a contributory pension because she does not yet meet minimum contribution criteria, each additional year o f work wi th contribution to the system i s counted as two years o f contribution toward the 30-year requirement.
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160. Along with the manner in which pension benefits are adjusted, the retirement age i s a parameter o f pension plans that has an important impact on long-term financial viability. For this reason, retirement age adjustments are a regular feature o f pension reforms in both developed and developing countries. There are reoccurring calls for the difference in the retirement age between men and women in Argentina’s SIJyP to be eliminated. There are s t i l l many countries that retain a lower retirement age for women; however, most recent reforms have equalized retirement ages between the sexes. Whi le under the public branch o f the second pillar the lower retirement age for women introduces a subsidy from affiliated men to affiliated women who typically l ive longer in covered retirement, under the commercial branch based on defined contributions to individual accounts, the effect i s neutral (if woman opt to retire at an older age) or negative as the cost o f longer annuities increases, reducing their monthly benefits.
161. Argentina can expect further population ageing, which will eventually raise demographic risks faced by the pension system again. Policy makers will face the need to either equalize retirement ages for men and women; raise retirement ages; or both. In several OECD countries, phased gradual increases in the retirement age have been introduced that better position public pension systems to handle rising l i fe expectancy. In the UK, the women’s retirement age has been gradually and almost imperceptibly raised. T h i s has been done in a manner which could provide lessons for retirement-age pol icy not just for women but for the whole population. Several observers use the UK’s equalization pol icy as an example for a “mortality-adjusted retirement age” (see Box 8). The advantage o f the proposals for mortality-adjustment i s that i t would continuously and automatically re-caliber pension plans to changes in longevity.
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Box 8. The Barr-Diamond Mortality Adjusted Retirement Age
A recent report proposing policy reforms required to face serious problems in the U K ’ s pension system published in 2004, argued that there are four (and only four) ways in which the pension system could be put on a financially sustainable track. These are: (i) lower pension benefits; (ii) raise pension spending; (iii) increase private savings; (iv) lengthen working lives. O f these four, the last i s the least debatable, yet the most contentious. Compared to earlier generations, working l i fe starts later due to more years in education; people stop working earlier; and are l iving longer, healthier lives. Pensions are more costly per person, as people contribute for fewer years per year in retirement. In the UK a man who retired in 1950 had contributed towards his pension for 4.5 years for every year in retirement, while a man who retired in 2004 had only contributed 2.25 years.
Few question the need to raise the minimum retirement age to a level that i s more rationally related to longevity, but how can policy makers bring about this change? If the minimum age at which pension benefits can be received i s to be adjusted for mortality changes, automatic adjustment should be based on four broad principles.
First, the adjustment should keep the ratio o f average years in retirement to average working years constant. Second, the rules should relate to date o f birth not to the date o f retirement, to avoid a wave o f retirement just before any reduction in the generosity o f benefits in response to improved mortality. Third, changes should be made monthly or annually, to avoid large changes in benefits across nearby cohorts. Large changes are inequitable and problematic, since benefits could otherwise differ significantly between people born in successive years, sometimes only days apart. The combination o f large changes and rules determined by date o f retirement would exacerbate the inefficient incentive to early retirement. Fourth, rules for changing benefits should be explicit, rather than adjusting the system in the light o f experience. The greater predictability o f adjustments under a given set o f rules can decrease political pressures. Nevertheless, there always remains the option o f legislation to change whatever the automatic rules produce.
Source: Barr (2001 and 2004) and Barr and Diamond (2006), “The Economics of Pensions”, Oxford Review of Economic Policy, 22/1.
162. An important argument frequently heard against raising the retirement age is that higher retirement ages wil l raise the rate o f unemployment, as older workers find it more difficult to find jobs and even face discrimination in the labor market. Empirically, in developed countries there has been a long decreasing trend in the average (voluntary) age o f retirement, yet unemployment has shown no trend decrease. Evidence for a number o f countries over a 10-year period shows no pattern whereby countries which encourage early retirement have lower unemployment.
163. Furthermore, in Argentina, the evidence on the labor market activity o f the current elderly from the ETEEP shows that those who participate in the labor market have l i t t le difficulty finding work. Considering the timing o f the survey-shortly after a financial crisis and economic contraction-the results suggest that the employment prospects o f the elderly who look for work are not disproportionately worse than among other age groups. Policies that allow or mandate early retirement, which i s long term outcome, as a response to unemployment, which i s generally a short term problem, are mismatched. If there i s a problem in the creation o f employment or even with discrimination against older workers, these issues would best be faced directly through labor market policies, rather than indirectly through the social security system.
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Part V. Conclusion: Issues and Opportunities in Argentina’s Pension Reform Debate
164. This report has focused on Argentina’s l o w coverage o f the pension system. Policy options were examined and discussed that could address such under coverage directly-such as improved deployment o f social assistance transfers to the elderly, and a more proportional link between workers’ contributions and public pension benefits (in Part 111)-as wel l as options that could help improve coverage indirectly-such as improvements to the current system and related institutions that might lower the perceived costs o f compliance with the mandate to contribute, restore credibility, and thus provide employers and households with improved incentives to participate in the system (in Part IV).
165. Since the 2001-2002 crisis there has been a debate about the strengths and weaknesses o f the national pension system, and a discussion about the merits and drawbacks o f the reforms that created the SIJyP. An environment that i s conducive to dispassionate discussion o f the objectives o f public pol icy with respect to old age income security i s starting to emerge. The National Government has initiated this discussion in an ongoing series o f public events and by inviting the participation o f a wide spectrum o f interest groups (MTEySS, 2003). Pushing this discussion further and linking i t with a wider consideration o f social insurance and social protection pol icy wil l be essential. Such a discussion would ideally lead to consensus on the old-age income support structure-both public and commercial-that Argentina would need to have in place in five or ten years time, as wel l as chart a course o f short term pol icy reforms that are consistent with reaching this objective.
166. T h i s report aims to contribute to the national pension debate in Argentina. The report started by revisiting principles o f Government mandated and/or administered old age income security systems. Three separate but complementary functions are generally distinguished (i) to prevent widespread poverty among the elderly; (ii) to help individuals and households smooth consumption over the l i f e cycle; and (iii) to manage uncertainty in ensuring adequate income in the face o f risks that private markets cannot insure or handle with difficulty, such as inflation and longevity. Argentina currently has a very complex set o f policies and institutions implici t ly and explicitly intended to meet some or al l three objectives. However, few o f these do so efficiently and in a way that i s fully financially sustainable. Past reforms to improve prospects for old-age income security have sometimes mixed these three objectives and have not been sufficiently comprehensive in their scope.
167. I t is neither objective nor intention o f this report to usurp the necessary national discussion with detailed suggestions o f what Argentina needs to reform and how. However, this report’s findings from a survey o f the elderly have motivated a discussion o f some o f the principal challenges for Argentina’s current social security and private pension institutions. This concluding section revisits some o f the points made in this discussion and proposes options that could be interesting for policymakers to consider.
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V. a. Restoring an Adequate Commercial Second Pillar
168. Even before the events o f 2001 and 2002, Argentina’s commercial second pillar suffered from many o f the problems o f cost and competition that plague other private pension systems in the region (Rofman, 2000 and 2003, Gill et al., 2004). However, on many performance measures, i t was far from the worst and showed particular promise given its relative infancy (FIEL, 2005). As presented in Part I o f this report, there are sound theoretical principles on which to base the establishment and continued role o f individual retirement savings accounts. As the loss o f earnings ability becomes more l ikely with population ageing, consumptions smoothing i s better achieved through individual savings instruments. But at current rates o f contribution, i t provides inadequate benefits. This i s a pol icy variable that has not been restored to the values intended by the architects o f the SIJyP.
169. Furthermore, any discussion o f the commercial second pillar has to confront the difficult issue o f AFJP portfolio risk and how investment should be regulated. A high concentration o f pension fund portfolios in public fixed-income securities comes at a high opportunity cost in forgone investment in the wider economy and could over-expose workers retirement savings to political risk-a key motivation for turning to the commercial sector to manage pension funds in the f i rs t place. There has been a decline in the share o f portfolios invested in bonds since the crisis, and the fund managers are looking for options to invest in the real economy. The longer that AFJP investments remain so concentrated in government debt, the more i t i s fair to question whether commercialization is bringing about any benefits. For this reason diversification o f AFJP holdings i s critical not only to the economic and financial performance o f the commercial second pillar, but also for i t s sustainability.
170. The cost o f second-pillar insurance i s a complex and challenging problem. The cost o f disability and l i fe insurance in the commercial branch o f the SIJyP second pillar i s much higher than what i t was in the mid 1990s. At the time, rates in Argentina were considered competitive, and were similar to the cost o f insurance in Chile today.34 However, regulatory, industrial and political factors have raised and kept the cost o f insurance high. In particular, problems l ie in Argentina’s high benefit expectations; generous eligibility requirements; regulation o f reserve requirements; rules that index insured capital to share value; structures for determining eligibility and processing benefits; the way AFJP portfolios are valued; and a market structure that has resulted in a close relationship between the fund managers and insurance providers which hinders healthy competition. Baer (2005) estimates that if Argentina’s insurance sector could achieve the l o w prices observed in the mid-l990s, affiliates to the AFJP system could reach retirement age with 8.9 percent more accumulated savings in their individual accounts.
~
34 Insurance in Chile provides a helpful benchmark, not only because o f that country’s emblematic status as the f r s t to institute multi-pillar reform and the maturity o f the sector, but also because mortality and the probability o f disabling events are similar. Thus, on purely actuarial criteria, the cost o f insurance in the two countries should be roughly the same.
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171. There are differences in opinion about what should be done. There are proposals to restore the original structure o f the market, readopting the accrued base treatment o f claims. This could induce reinsurance providers to return to the market, increase the risk pool, and with other structural changes and tougher regulation, could foster greater competition among providers o f AFJP disability and l i fe coverage.
172. There are proposals for second pillar disability and l i f e insurance to be “re- nationalized”, that cite Mexico’s current model for workers in the private sector. One o f the immediate effects o f such a change would be to enlarge the risk-pool (although, as noted previously, the importance o f this to current high costs i s debated). However, i t is important to note that despite (or perhaps because of) centralized, public administration the cost o f Mexico’s insurance is the highest in the region.35 Furthermore, as mentioned above, the risk pool could also be enlarged through national or international private reinsurance under the right market conditions. Finally, the effect o f re-nationalization wil l depend on institutional capacity and would have to address concerns for transparency in the current provision o f insurance.
173. In the discussion o f reforms, the Government will have to weigh al l o f i t s options carefully. Despite the difficult condition in which the insurance sector currently finds itself, i t could s t i l l be viable, and with the right regulatory changes, could be as large and competitively priced as the insurance industry in Chile (CEF, 2004, Baer, 2005). There are several examples and lessons from other commercial second-pillar systems in the region that could prove The benefits o f centralizing-in terms o f increasing the size and efficiency o f the r isk pool-could be attained without nationalization or even reliance on the reinsurance industry. If disability and survivor insurance benefits are largely uniform and determined by law, there may be fewer cost- savings to be gained from consumer choice under competitive provision than from outright separation and centralized provision o f coverage. This centralization can but need not be under public administration. Chile’s new unemployment insurance-private, centralized and administered by a consortium o f the fund management industry-could provide interesting lessons. Disability and l i fe coverage to al l AFJP affiliates as a block could be auctioned to a single private provider, and the auctioning process renewed periodically.
174. However, in order for private provision-whether decentralized or centralized- to once again be viable, specific changes would have to be underpinned by consumer protection mechanisms; clearer rules on what and how information is disclosed by
35 Indeed, since the statutory amount o f disability benefits in Mexico’s centralized system (35 percent o f the lost wage) i s about half the amount o f mandatory disability insurance in Argentina (70 percent o f the lost wage), the Mexican example i s even less appealing. If disability benefits in Mexico were as high as they are in Argentina, the costs o f the centralized structure would be even greater. 36 Adjusting insurance benefits according to internationally recognized standards and restoring the accrued base for claims could lower the cost o f providing coverage, restore reserves and could attract reinsurance companies back into the market. Further, clearly separating retirement savings from fees and insurance charges, as in Chile, could increase transparency. Such a change-however positive in terms o f transparency and possibly competition-would imply substantial changes in how contributions are collected. Thorough study o f the benefits and costs o f these changes would be required.
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insurance companies; the development o f risk-focused supervision; and enhanced corporate governance standards.
K b. A Purposeful and Predictable Policy for Benefit Adjustment
175. This report argues that the lack o f a clear adjustment rule for public pensions could have a detrimental effect on the fiscal sustainability and equity o f the system. Currently, the courts are playing a dominant role in determining benefit-adjustment pol icy in Argentina.
176. The lack o f a credible, systematic, predictable adjustment rule-that ties benefits to wages, inflation, a combination o f the two, or some other salient index-creates a vacuum which i s being f i l led with numerous law suits brought by beneficiaries, which have made Argentina a country with one o f the highest levels o f legal action related to pensions. The Government has been attentive in adjusting minimum pensions to keep covered households out o f poverty in old age. However, these ad-hoc, partial adjustments are not sufficient to mitigate the r isks described above. To the extent that affiliates with greater resources to pay transactions costs o f legal proceedings are more l ikely to present cases, the benefits o f ad-hoc, judicially awarded benefit adjustments are l ikely to accrue to the better off, better informed and the better-connected.
177. Argentina’s National Constitution presents constraints on the options that the National Government has in formulating an adjustment rule. However, there are many examples o f indexing policies from other countries cited previously that would allow the Government to specify adjustment rules. A credible and predictable adjustment pol icy would be important to restore the credibility o f public pension benefits in the eyes o f prospective contributors.
K c. Argentina’s Multiple Pension Regimes
178. There are large disparities between the pension parameters o f the SIJyP, and the public pension plans for provincial and municipal c iv i l servants that remain separate from the system, as wel l as special regimes for other select groups (members o f the legislature, judges, the military and others).
179. The mult ipl ici ty o f substitutive pension plans has a negative impact on equity and efficiency, for several reasons. First, fragmentation o f old-age income and broader social insurance provision hinders the quality and efficiency o f risk-pools. Second, by limiting the size o f any particular risk pool or affiliated group, this same fragmentation prevents the full exploitation o f economies o f scale to lower administrative costs. To the extent that this fragmentation remains, and in the context o f a shrinking “formal sector”, the forgone benefits o f scale-both in the public and commercial administration costs-will continue to grow. Third, differences in eligibility criteria and plan structure can create difficulties for recognition o f acquired r ights and the portability o f benefits between plans, which can create disincentives to the movement o f labor. Fourth, wide variation in plan parameters, such as benefit levels, contribution rates, and benefit adjustment, can lead to inequitable outcomes, often subsidized directly by local, provincial and the national government at the expense o f more targeted uses o f public resources.
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180. The close link between subsidized sub-national public pension plans and the fiscal federalism o f Argentina’s public finances, poses a number o f additional problems. First, the effect in terms o f inequitable outcomes i s not contained to a given municipality or province. The complex system o f transfers between the national, provincial and municipal governments spread this effect across al l tax payers. Second, moral hazard created by a separation between those who set the benefits o f sub-national pension plans (provincial and municipal governments) and the institutions that at least faces an implici t obligation to bai l out these plans should they fai l (the national government), poses risks to Argentina’s fiscal stance. Third, continued tax subsidization o f these plans could displace subsidies to better targeted forms o f social protection.
18 1. Finally, regarding Argentina’s professional pension plans, although their reported financial solvency and adequate reserves eliminate the fiscal concerns mentioned above, other concerns for distortions, fragmentation and how this hinders overall equity outcomes remain. Although there i s no record o f a professional plan going bankrupt and requiring a government bail-out, the precarious situation o f similar plans in Paraguay and Uruguay and the current threat they pose to the national treasuries o f both countries, make this a risk. The fact that the professional pension plans are not subject to government regulation or even non-government independent scrutiny, and yet benefit from government mandates which could entail implici t guarantees, i s an, as o f yet, un- quantified fiscal risk.
Kd. SIJyP Second-Pillar Choices
182. A remaining choice between the public and commercially administered branches o f the SIJyP second pillar poses several challenges. First, the transactions costs of second-pillar cover wil l need to be taken into account. Second, i t might make the assessment o f future public pension liabilities more difficult, although as more SIJyP affiliates j o i n the private branch o f the second pillar, this becomes less o f a problem. Third, the choice would need to go hand in hand with a redefinition o f the role o f the State in providing income security in old age. Fourth, along similar lines, the continued existence o f a public, defined-benefit, earnings-related pension plan, leaves open the option o f return and makes this an option with uncertain, longer-term costs for future tax- payers.
183. Currently, there are debates about allowing AFJP affiliates to return to the public branch o f the second pillar. Were a periodic choice to switch offered, i t would have to be carefully assessed. In other countries, such choice has been reported to have led to uncertainty in calculating public pension liabilities, adverse selection, “risk dumping, and strategic gaming to capture public pension subsidies. Better-off, informed affiliates might be more l ikely to benefit and capture rents from regular option to switch. Thus the social costs o f offering periodic choice would need to be carefully weighed against the individual benefits o f this choice. Colombia’s social security system offers examples o f these problems.
184. T h i s said, for the sake o f long-term stability and credibility o f the system, there may be benefits in addressing legitimate grievances that may exist among SIJyP affiliates
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who found themselves affiliated to the commercial branch o f the second pillar without their clear choice. But the implications o f any offer to choose again between the public and commercial branches would need to be carefully evaluated, especially if going beyond a one-off, conclusive, and time-bound offer Hungary allowed a temporary and l imited option for certain affiliates to switch back to the public plan, but targeted this option to workers retiring before 2012, those already too o ld to benefit f rom individual savings whose decision to switch was ill advised. Regarding second-pillar choice as a permanent feature o f the SIJyP, to the extent that affiliate choices in Argentina fol low international patterns, the public option may become less important in time.
Ke. The Retirement Age and Future Demographic Risk
185. L i f e expectancy at birth has increased by more than 10 years since the middle o f the twentieth century. Argentina can expect further population ageing, albeit at a less accelerated rate than recent decades (MTEySS , 2005), which wil l eventually raise demographic risks faced by the pension system again. Whi le a demographic bonus i s expected in the form o f a temporary and limited increase in the share o f population aged 15 to 64, this demographic window o f opportunity could be taken advantage of. Policy makers wil l face the need to either equalize retirement ages for men and women; raise the retirement ages; or potentially do both. In several OECD countries, phased gradual increases in the retirement age have been introduced that better position public pension systems to handle rising l i fe expectancy.
186. One option for pol icy makers i s to introduce a “mortality-adjusted retirement age”. This mechanism is being considered in the UK, where women’s retirement age has been gradually and almost imperceptibly raised. T h i s has been done in a manner which could provide lessons for retirement-age pol icy for the whole population. The advantage o f the proposals for mortality-adjustment i s that i t would continuously and automatically re-caliber pension plans to changes in longevity, and if done correctly, can avoid the need for periodic, dif f icult adjustments.
187. A powerful argument frequently heard against raising the retirement age i s that higher retirement ages wil l raise the rate o f unemployment, as older workers find i t more difficult to find jobs and even face discrimination in the labor market. However, the evidence shown in this report would suggest that unemployment best be dealt with directly through labor market policy, than indirectly through the social security system.
K$ The Deployment of Non-Contributory Benefits
188. Argentina’s most important and pressing challenge is that o f extending coverage. The current PNC program i s important, and on the whole, the elements o f the program designed to be targeted to the poor perform reasonably well. However the graciable pensions granted by members o f Congress are an exception. Although these sort o f discretionary benefit programs exist in other countries, they rarely are as large as the program in Argentina either in total amount paid or number o f benefits. Although non- contributory benefits as a whole are wel l targeted and have had a positive impact on
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lowering poverty, the performance could be improved with changes to the program, particularly to the gradable benefits.
189. If measures to raise or expand targeted non-contributory benefits are considered, they could be accompanied with the reduction o f the graciables. Although there has been a positive shift in the composition o f non-contributory benefits since 2000 away from the graciables, these s t i l l represent a large number (over a third) o f benefits.
190. When it l i f ted the ration on targeted social assistance pensions in 2003, Argentina fundamentally changed the nature o f at least the targeted benefits in the PNC program, creating a form o f coverage that i s closer to a right than a standard social program. From the moment this decision was taken, at least in theory and with respect to the risk o f poverty in old age, Argentina introduced full statutory coverage. If al l the elderly have the right and opportunity to undergo the means test, and are guaranteed a benefit if they are indeed eligible, full coverage against the contingency o f poverty in old age i s achieved. For despite targeting, this coverage i s universal. By definition, a risk pooling or insurance instrument wi l l always have fewer “losers”-those who receive a pay-off from the pool should they suffer the bad state that the instrument seeks to cover-than the number who contribute into the pool. After all, there have to be a sufficient number o f “winners” to compensate the losers, or else the instrument wil l not be able to pool r isks effectively (Barr, 2001). Even in commercial insurance, the payment to contributors who suffer the bad state may be actuarially fair, but not al l contributors are guaranteed payment (Gill et al., 2004).
191. In terms o f preventing poverty in old age, whatever coverage gap exists between the poor and non-poor elderly since 2004 reflects more mundane, although equally important implementation problems. There i s st i l l a lack o f clarity in how PNC are targeted, and implementation after the elimination o f the ration, has been relatively slow (increasing by a substantial but s t i l l limited 60,000 beneficiaries from 2003 to 2005) leaving many o f the elderly poor s t i l l without the benefits to which they are l ikely to be entitled.
192. The shift f rom a mere social assistance program to a universal right to protection against poverty in old age, wi l l eventually force a discussion on where best to place the PNC in order to improve implementation and attain optimal impact. Whether the non- contributory pension benefit continues to be administered from the Ministry o f Social Development or i s re-integrated to ANSeS under the Ministry o f Labor needs to be evaluated with reference to international best practice. The critical question to answer before this decision can be taken i s whether the current placement o f the program l imits i t s efficiency and efficacy o f implementation. The smaller network and limited reach o f the CNPA may create a de-facto ration on PNC. Finally, the PNC for old age and disability are set by law at 70 percent o f the SIJyP minimum pension. This means that under the current structure changes in the amount o f a government guarantee paid by one ministry are set by the decisions made at another.
193. When determining the institutional structures, i t wil l be important to find a mechanism that wil l allow for parameters and eligibility conditions to be closely
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coordinated between the different programs so as to take household incentives into account. The simulations o f the fiscal costs o f proposed changes and expansion o f non- contributory and proportional minimum contributory benefits in Part I11 o f this report illustrate the importance o f increasing rates o f current participation in the SIJyP. The pattern o f household behavior with respect to contribution requirements for public pension benefits frequently observed in Argentina and elsewhere, suggests that incentives are important. Additionally, maintaining an entire bureaucracy to administer the non- contributory benefit separate from the large public infrastructure already paying public pensions may entail duplication o f efforts and waste. Finally, keeping the non- contributory benefit separate from the SIJyP makes it too easy for pol icy makers to ignore a critical question when it comes to striking the right balance between full coverage and fiscal solvency: with an un-rationed social assistance benefit targeted to the elderly, does Argentina need to retain a state-subsidized, proportional minimum contributory benefit? As discussed in Part 111, such a benefit may indeed s t i l l be useful, not as a guarantor o f minimum old age income, but as a device for improving incentives to participate among lower-income workers.
Kg. Looking Even Further Ahead
194. Looking beyond the important areas o f improvement to the national pension system in the medium term discussed in the sections above, there are a number o f long- term questions for future reflection.
195. For generations, the expectation held by Argentineans o f a “decent pension” was 80 percent o f a relevant multiple o f earnings in the years leading up to retirement. This expectation did not change with 1993 reforms, but the institutions did change and were no longer intended to meet these expectations. With respect to income security in old age, what have Argentine households come to expect from the State? Even after the fundamental re-distribution o f risk brought about by the 1993 reforms, have household expectations been altered? What are the r ights households are entitled to, if they meet the responsibility to comply with the mandate to participate? T o be covered against the r isk o f poverty in old age, or something more? If households expect more from the State than just to prevent poverty in old age; manage the risk o f inflation; regulate financial risks, can that expectation be made more explicit? When Argentine’s call for Government to take a role in helping to smooth consumption from o ld age through a mandatory system, what do they expect (measured in average replacement rates) from their compliance with the mandate? These are some o f the questions that a broad national debate will need to address in the future.
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Pencavel, J. (1986), ‘Labor Supply o f Men: A Survey’, in 0. Ashenfelter and R. Layard (eds.), Handbook o f Labor Economics, Amsterdam: Noth-Holland, pp. 3-1 02.
Pozzebon, S. and 0. S. Mitchell (1989), ‘Married women’s retirement behavior’, Journal o f Population Economics, vol. 2, pp. 39-53.
Roca, E. and J.M. Moreno (1999) “Desproteccih Social y Exclusi6n de la Seguridad Social”. XI11 Congreso Nacional de Derecho del Trabajo y de la Seguridad Social, Bariloche, Argentina. April.
Rofman and Lucchetti (2006) Household Survey Data-Base of Social Security Indicators, Social Protection Unit, Human Development Department, Regional Office for Latin America and the Caribbean, World Bank (as yet unpublished).
Rofman, R.; G. Stirparo and P. Lattes (1997) Proyecciones del Sistema Integrado de Jubilaciones y Pensiones 1995-2050. Estudio Especial 12, Superintendencia de AFJP, Buenos Aires.
Rofman, Rafael (2005) “Social Security Coverage in Latin America” Social Protection Discussion Paper No. 0523, World Bank, Washington DC.
(2004), Social security and the economic crisis in Argentina, mimeo, Washington DC: The World Bank. (2000) “The Pension System in Argentina: Six Years after Reform” Social Protection Discussion Paper
No. 0015, Washington DC. SAFJP (2004) El RCgimen de Capitalizacibn a diez aiios de la Reforma Previsional. Superintendencia de
AFJP, Buenos Aires. (1 998) El Sistema Previsional Argentino. Buenos Aires: Superintendencia de Administradoras de Fondos
de Jubilaciones y Pensiones, Buenos Aires. Sana, M. and PantClides, E. (1 999) “La Pobreza entre 10s Ancianos. L o que dicen 10s datos a la luz de las
limitaciones de la medici6n”. Desarrollo Econ6mico, Vo1.38, 152 (January-March). SSS (2003) Libro blanco de la previsih social. Secretaria de Seguridad Social, Ministerio de Trabajo,
Empleo y Seguridad Social, Buenos Aires. UAFJP (2003) “Sistema Previsional Argentino: Propuesta de Reforma” Uni6n de Administradoras de
Fondos de Jubilaciones y Pensiones” Buenos Aires, Julio. Whitehouse, E.R. (2005) “Individual Decisions to Switch Between Public and Private Pension Schemes”
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Technical Annex. Data Quality Assessment of the ETEEP
T h i s Annex presents a quality assessment o f the data provided by the ETEEP. This quality assessment has two components: (i) the calculation and analysis o f non-response rates to a selection o f the most important questions asked in the ETEEP questionnaire; and (ii) the comparison o f certain indicators drawn from the survey with Argentina's most widely used official household survey, the EPHC. Comparing the data collected in the ETEEP with data from other survey sources provides insights on the quality o f the smaller survey o f the elderly, and the potential biases that exist in the data set due to non- response. It i s important that these features o f the data be taken into account when interpreting the results presented in the main body o f this report.
I. Non-Response Rates in the ETEEP Data
Declining unit response rates potentially affect data quality if non-response leads to bias because units that respond differ from those that do not. In addition, people who respond to a survey are relatively more reluctant to report on certain topics than on others, leading to i tem non-response. For example, i tem response rates for income are generally lower than for many other kinds o f questions. Moreover, both unit and i tem non-response can be present at the same time, affecting data quality. T h i s is usually the case when different non-response patterns on individual incomes are observed in the income distribution.'
I tem non-response is only one o f many sources o f potential error in income measures. Reporting error and cognitive factors (which are not discussed in this annex) are other possible sources o f error. Response rates would therefore provide information about one facet o f the quality o f the data. However, i t i s important to develop standard and consistent definitions o f the rate o f non-response to allow users to make appropriate comparisons across surveys and over time.
Response rates for a specific question in a survey are defined in terms o f (a) the eligible group for a set o f questions, and (b) whether or not they answer these questions. Definitions o f consistent sets o f i tem response rates vary across surveys because the questions o f interest, the group(s) o f interest, and the structure o f the survey instruments will vary.
The general process for defining consistent i tem non-response rates is :
0
0
0
0
0
Specify the question o f concern; Identify the unit or groups eligible to be asked the question o f concern; Identify the path through the survey that determines which respondents are eligible to answer the question o f concern; Define the numerators and denominators o f the response rates in terms o f the question and eligibility; Present both the definitions and the rates o f responsehon-response.
Atrostic and Kalenkoski (2003). I tem Response Rates: One Indicator o f How Wel l We Measure Income.
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As an example, i tem response rates for questions regarding income in a typical household survey are examined. The household i s the survey unit, but information about income i s asked o f certain individuals within the household, typically members o f working age. Furthermore, al l persons may not be eligible for specific income items. For example, people not working do not receive labor income and so, there would be no questions about how much labor income they receive. But there would be questions both about receipt o f other form o f income, and the respective amount. There may also be questions about frequency o f income receipt. The denominators o f meaningful i tem response rates, therefore, are l ikely to vary among income items. For example, “individuals eligible to receive salary income” wil l not be the same as “individuals eligible to receive pension incomes”. The numerators wil l be the number o f reported responses among the eligible group. Additional i tem response rates could be defined to address other dimensions o f non-response.
With the above in mind, there are several factors that are particular to the ETEEP. In this survey the definition o f eligible groups becomes even more important because the survey provides information on three distinct population groups. The core sample o f the survey i s (i) persons aged 60 and older who l ive in any one o f the fol lowing circumstances: l ive by themselves, l ive with other persons younger than 60, or l ive with other people aged 60 or more. When there were more than one household member aged 60 and older, the elderly individual chosen to be the respondent was the one whose birthday was closest to the day o f the interview. However, to analyze issues such as the living conditions, poverty and household strategies it was important to have information on al l members o f the household, since a high proportion o f people aged 60 and older l ive with younger family members. Thus for certain questions the eligible group i s expanded to cover: (ii) al l persons aged 60 and older living in the household; and (iii) all household members, regardless o f their age.
The above implies that for certain questions in the survey, there are up to three different rates o f non response that can be calculated. The appropriate denominator to use among the three possible groups wil l vary according to a researcher’s interest.
The core sample o f interest in the ETEEP presents both advantages and disadvantages when compared with other sources o f micro-data. On the one hand, i t has the advantage that people interviewed in most cases (for most questions) are responding for themselves. This avoids the mistakes and omissions that arise when third parties respond to the survey, for example when a non-working spouse reports on the labor conditions o f an employed household head that i s not present at the time o f the interview. On the other hand, since many questions make reference to events and choices made far in the past, error and non-response rates can be higher when compared to surveys that focus on events that occurred nearer the date o f the interview, such as specific surveys on labor conditions. In fact, these recall problems are common to al l labor history surveys and the still-rare social security surveys that have been conducted elsewhere. For example, in surveys that focus on social security conducted in other countries, there i s typically a substantial difference between self-reported years o f contributions to the pension system and registered years o f contribution observed in administrative data.
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The ETEEP interviewed 3,010 persons 60 or older. In order to reach this number, 5,427 households with people aged 60 or more were visited. Among them, the interview was rejected in 1,800 cases; in 285 cases the respondent was not present; and in 328 cases the randomly chosen respondent was disabled. These numbers imply a unit non-response rate o f 44.5 percent and a rejection rate o f 33.2 percent. The tables bellow show non- response rates to specific questions o f interest, calculated for each o f the three population groups.
In general, the basic set o f questions asked to al l three groups o f people referring to age, sex, c iv i l status, position in the household, education and employment does not show high non-response rates-i.e., rates higher than 5 percent (Table A.l). In fact, in both groups (i) and (ii), the highest rate o f non-response i s 1.8 percent. In contrast, group (iii) shows some high rates o f non-response, but only in certain variables such as education, variables that capture labor condition (employed, unemployed or inactive) and variables indicating whether the person i s retiredheceiving pension benefits.
Table A.1. Non-Response Rates Groups (i), (ii) and (iii). Basic Set of Questions
Group (i) Group (ii) Group (iii) Self - reporting persons
aged 60 and older in selected households households
All persons aged 60 and older in selected Name/definition All households members in
selected households
Sex Age Civil status Head of household Spouse of head Kinship with respondent Literate Attend school Educational level Labor category Employed (definition 1) Unemployed (definition 1) Inactive (definition 1) Retired
0.0 0.6 1.7 0.2 0.0 0.0 0.0 0.0 0.3 0.0 0.2 0.4 0.4 0.0
0.0 1.9 1.3 0.1 0.0 0.0 0.0 0.1 1.3 0.0 0.1 1.8 1.8 0.0
0.8 1.8 2.5 0.7 0.0 0.5 0.7 2.6 6.1 0.0 3.0 8.9 8.9 12.0
Source: WB staff calculations based on ETEEP 2003.
On the other hand, Table A.2 shows non-response rates to questions asked exclusively to people in group (i), mainly in relation to individual matters but also to the respondent’s neighborhood and housing characteristics. Variables with non-response rates higher than 5 percent are: total years o f pension contribution, institution or organism that granted the pension, length o f retirement procedures, reasons for being retired, reasons for continuing to work after retirement, and sector o f current job. In contrast, questions related to the characteristics o f the neighborhood and housing show very l o w non-response rates.
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Table A.2. Non-Response Rates Group (i). Questions about Individual and Housing Characteristics
YO o f missing cases Namddefinition % o f missing
cases Namddefinition
Have you ever made pension contributions Years o f pension contribution Currently retired Received pension because o f hisher past contributions Received pension for disability because o f hidher past contribution: Received pension because hisher wifehusband died Received a non-contributory pension Received pension for other reason Institution or organism that gave himher the pension Age o f retirement Lenght of retirement procedures Reason for being retired Reason for not being retired Have you made any investment for your old age Did your investments help you during your old age Given that you are retired, why do you work Employed (definition 2) Unemployed (definition 2) Inactive (definition 2) Sector where you currently work Have you ever worked? Years o f work
0.0 9.4 0.0 0.0 0.0 0.0 0.0 0.0 5.5 4.9 8.1 9.2 4.3 0.0 2.4 18.6 2.2 2.2 2.2 7.2 0.0 5.5
Ownership o f house and plot House in urban area House in shantytown Number o f rooms Poor dwelling Poor floors Poor roof Availability o f water in lot Access to public water system Availability o f hygienic restroom Access to public sewerage system Electricity in the block Telephone ownership
2.9 0.0 0.0 0.2 0.4 0.7 4.4 0.1 1 .o 0.0 0.1 0.0 0.9
Source: W B staff calculations based on ETEEP 2003.
Lastly, Table A.3 shows that there was a high rate o f non-response to questions about employment and contribution history, asked exclusively to people in group (i), probably arising from the difficulty to recall circumstances and choices far in the past. Also, the l o w rate o f response to these questions comes as little surprise, as respondents may have been reluctant to admit to past evasion o f pension contributions or informality.
Table A.3. Non-Response Rates Group (i). Questions about Employment and Contribution History
YO of missing cases in each job 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 1 3
Name/definition
Sector 4.1 4.4 5.5 4.8 3.3 5.6 4.2 5.8 0.0 0.0 0.0 0.0 0.0 Years worked 1.6 5.5 7.7 8.0 16.1 10.4 9.7 15.4 16.0 17.6 0.0 0.0 0.0 Yearsofpension contribution 5.4 40.0 43.3 46.7 53.6 48.0 41.7 51.9 36.0 52.9 0.0 0.0 0.0 Labor category 1.9 2.4 3.7 2.7 3.3 3.2 1.4 1.9 0.0 11.8 0.0 0.0 0.0 Finn size 10.6 10.0 10.2 9.4 10.0 6.4 5.6 7.7 4.0 17.6 0.0 0.0 0.0 Informalworker(definition1) 7.4 6.7 7.9 6.1 5.7 4.0 4.2 3.8 0.0 11.8 0.0 0.0 0.0 Informal worker(definition2) 5.4 40.0 43.3 46.7 53.6 48.0 41.7 51.9 36.0 52.9 0.0 0.0 0.0
Source: W B staff calculations based on ETEEP 2003.
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II. Comparison with the EPHC
In order to carry out this comparison a sub-sample o f individuals aged 60 or more (not living in Patagonia) was extracted from the EPHC. This sub-sample has 5,902 observations-distributed according to the size o f the household as described in Table A.4-and i s comparable with group (ii). Moreover, with the purpose o f making comparisons for the core population o f the ETEEP, that is group (i), another sub-sample was extracted from the EPHC. T h i s sub-sample randomly takes one person from all the households with individuals aged 60. This new sub-sample has 4,353 observations.
Table A.4. Comparison ETEEP - EPHC: distribution according to number of eligible household members
Persons aged 60 or more not l iv ing in Patagonia
u ..l:”:Ll- ETEEP EPHC (0 (ii) (9 (ii)
frea % frea % frea % frea %
1 2 3 4 5 6 8 9
Total
1,860 1,060
69 11 2 4 3 1
3,010
61.79 35.22 2.29 0.37 0.07 0.13 0.10 0.03
100.00
1,860 43.28 2,860 65.70 2,860 2,120 49.33 1,442 33.13 2,884
207 4.82 48 1.10 144 44 1.02 2 0.05 8 10 0.23 24 0.56 1 0.02 6 24 0.56
9 0.21 4,298 100.00 4,353 100.00 5,902
48.46 48.86
2.44 0.14
0.10
100.00
Source: WE3 staff calculations based on ETEEP and EPHC 2003.
A set o f basic variables was selected for this comparison based on two requirements: that the corresponding question was asked in both surveys and that they allow describing the population o f interest. The selected variables refer to individual characteristics such as gender, age, marital status and household position, level o f educational attainment, employment condition, and regional distribution.
Mean and standard deviation o f the variables for both surveys and population groups were calculated (Table AS). The results show few significant differences between the ETEEP and EPHC samples in terms o f their individual characteristics. The proportion o f women, the average age, the age distribution, marital status, and the share o f household heads are very similar in both surveys. Only small differences can be observed in the youngest group [60-64]-which i s slightly larger in the ETEEP than in the EPHC-and in the share o f widows-which is also slightly higher in group (i) o f ETEEP.
However, with respect to level o f educational attainment significant differences between the two samples are apparent. In the ETEEP sample, for both groups (i) and (iii), there i s a much higher percentage o f people with incomplete primary school. In contrast, in the EPHC sample the percentage o f people with primary, secondary, and complete tertiary education is greater. This may show that when elderly people self-report their education,
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levels o f educational attainment appear to be lower than when the answer i s provided by a third party (a younger household head or more typically the non-working spouse).
Table A.5. Comparison ETEEP - EPHC: descriptive statistics on selected variables Persons aged 60 or more not l iv ing in
Patagonia E T E E P E P H C
(1) (ii) (1) (ii) mean st. dev mean st. dev mean st. dev mean st. dev
Ind i v idua l characteristics male
age group [60,641 [65,691 [70,741 [75,791
[85,891 [90,941 [95,991
single married widowed
age
[ 8 0,s 4 1
marital status
head o f household spouse o f head o f hh
Education max level o f education
incomplete primary complete primary incomplete secondary complete secondary incomplete tertiary complete tertiary
EmDlovment status retired retired (out o f inactive) inactive active employed unemployed (definition 1) unemployed (definition 2) labor category
employer self employed employee family worker non-paid
Region cuyo am ba nea noa pampeana
# obs
0.38 7 1.04
23.08 23.02 22.76 16.45 10.02
3.42 1.08 0.18
0.07 0.45 0.42 0.70 0.17
0.43 0.34 0.08 0.09 0.02 0.05
0.61 0.70 0.78 0.22 0.17 0.05 0.06
5.8 36.2 55.1
2.9
0.05 0.42 0.09 0.1 1 0.33
3,010
0.49 7.44
23.1 46.1 68.9 85.3 95.3 98.7 99.8
100.0
0.25 0.50 0.49 0.46 0.38
0.49 0.47 0.28 0.29 0.12 0.21
0.49 0.46 0.42 0.42 0.38 0.21 0.23
5.8 42.0 97.1
100.0
0.22 0.49 0.29 0.31 0.47
0.41 71.07
23.1 23.4 22.3 16.5 9.5 3.5 1.5 0.2
0.08 0.56 0.3 1 0.62 0.24
0.41 0.36 0.08 0.10 0.02 0.04
0.57 0.66 0.78 0.22 0.18 0.04 n.a.
6.5 38.4 51.6
3.5
0.05 0.43 0.08 0.1 1 0.32
4,254
0.49 7.56
23.1 46.6 68.8 85.3 94.8 98.3 99.8
100.0
0.26 0.50 0.46 0.49 0.43
0.49 0.48 0 .27 0.30 0.12 0.20
0.49 0.47 0.42 0.42 0.38 0.21
n.a.
6.5 44.8 96.5
100.0
0.21 0 .50 0.28 0.32 0.47
0.40 70.97
28.22 19.43 19.57 16.47 9.90 4.46 1.70 0.27
0.08 0.46 0.39 0.69 0.18
0.26 0 .39 0.09 0.14 0.03 0.09
0.5 1 0.71 0.72 0.28 0.25
0.03
6.4 36.3 55.8
1.5
0.06 0.62 0.03 0.07 0.22
4,353
0.49 8.14
28.2 47.7 67.2 83.7 93.6 98.1 99.8
100.0
0.27 0.50 0.49 0.46 0.38
0.44 0.49 0.28 0.35 0. I 7 0.28
0.50 0.45 0.45 0.45 0.43
0.18
6.4 42.8 98.6
100.0
0.23 0.49 0.18 0.26 0.41
0.42 70.97
26.94 20.59 20.50 16.10 9.55 4.5 1 1.58 0.24
0.07 0.57 0.3 1 0.63 0.25
0.25 0.39 0.09 0.15 0.03 0.09
0.49 0.68 0.73 0.27 0.24
0.03
7.0 37.9 53.6
1.5
0.06 0.63 0.03 0.07 0.22
5,902
0.49 7.97
26.9 47.5 68.0 84.1 93.7 98.2 99.8
100.0
0.25 0.50 0.46 0.48 0.43
0.43 0.49 0.29 0.36 0.18 0.28
0.50 0.47 0.44 0.44 0.42
0.18
7.0 44.9 98.5
100.0
0.23 0.48 0. I 7 0.25 0.41
Source: WB staff calculations based on ETEEP and EPHC 2003.
Variables on employment condition are the most difficult to compare between these two surveys. T h i s i s because the EPHC i s a survey mainly designed to capture labor market issues and uses a complex path o f questions in order to arrive at precise measures o f labor market and employment status. In contrast, the ETEEP has broader objectives concerning
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i t s population o f interest and it applies fewer questions to determine the employment category o f individuals. Bearing this in mind, differences between both surveys are not surprising but must be interpreted with caution.
The rate o f participation in the labor market i s 5 to 6 points lower in the ETEEP. Also the employment rate is lower. In terms o f unemployment, only a rough comparison for group (i) can be made: the unemployment rate in the ETEEP i s twice as high as in the EPHC. However, the distribution among labor categories-employee, self-employed, employers and family workers without salary-shows much smaller differences, mainly in group (i).
In terms o f regional distribution, the differences between both surveys are due to the fact that the sample frame o f the ETEEP was designed to produce representative data for the population aged 60 or more in each region. That i s why younger regions such as NEA, NOA and Pampeana have higher shares in the ETEEP, and Cuyo and AMBA have lower shares.
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