Notes on Social Insurance in Latin America

1. Notes on Social Insurance in Latin America ECLAC-PSE Seminar Santiago, Chile January 2013. Santiago Levy, IDB.

2. Diagnosis: a segmented system Social insurance (SI) in LA is segmented, with coverage and funding source depending on labor status: • Salaried workers are expected to receive a bundle of benefits including, inter alia, health, work-risk, death and disability insurance, and retirement pensions (contributory social insurance, CSI) • These benefits are paid from wage taxes • Non-salaried workers (self-employed, working on a piece-rate basis, or working in a family firm) were, until relatively recently, uncovered by SI • But many governments have recently put in place non-contributory pension and health insurance programs (NCSI) • These benefits are paid out of general tax revenues and are often (but not always) explicitly limited to workers who are not covered by CSI

3. CSI covers only a minority of the population in most LA countries Coverage correlated with income. By-and-large, no changes in coverage over time Note: Each bar represents the percentage of employed workers aged 20 and older who are currently contributing to social security; the number in parenthesis after the country name is the average coverage in that country. The thick horizontal line corresponds to the population-weighted Latin American average. Source: Rafael Rofman and María Oliveri 2012, based on data from household surveys.

4. In response to low coverage of CSI, governments have created NCSI programs… Examples-pensions: • Bolivia: Renta Universal de Vejez "RentaDignidad“ (since 2008): All elderly 60+ eligible, modest pensions, costs 1.25% of GDP • Brazil: Benefício de PrestaçãoContinuada and Previdência Rural (extended and made more generous in 1991): BPC is targeted by income, Previdênciaby place of residence (jointly cover ~40% of elderly 60+), very generous pensions, jointly cost 1.16% of GDP • Chile: PensiónBásicaSolidaria (since 2008): Targeted by income (benefits to poorest 60% of elderly 65+), transfers more generous if not receiving contributory pensions, costs 0.55% of GDP Examples-health: • Colombia: RégimenSubsidiado (since 1993): benefits only for those not covered by contributory social insurance, costs 1.2% of GDP • Mexico: Seguro Popular (since 2003): benefits only for those not covered by contributory social insurance, costs 0.4% of GDP (but there were other programs before; all told, NCSI health programs cost about 1.3% of GDP).

5. Social insurance: accomplishments and challenges NCSI has had important benefits for households 1. Increases in coverage, and therefore protection to households who would otherwise be unprotected: • The Régimen Subsidiado in Colombia increased coverage of health insurance from below 30% to more than 90% in 2010 (Camacho et al. 2012) 2. Declines in old-age poverty: • The 70 y Más program in Mexico, which provides pensions for those 70+, reduced poverty gap among recipients from 0.61 to 0.46 (Galiani and Gertler 2009) 3. Makes it possible for elderly to stop working: • Evidence from Previdencia Rural in Brazil (Carvalho Filho 2008), 70 y Más in Mexico (Galiani and Gertler 2009; Juarez and Pfutze 2012), Moratorium in Argentina (Bosch and Guajarro 2012) But the co-existence of CSI and NCSI also raises serious concerns • Fiscal sustainability • Erratic coverage • Perverse incentives to informality

6. Is NCSI fiscally sustainable? • Unless they are managed very carefully, NCSI programs can saddle governments with large future liabilities, undoing one of the accomplishments of earlier pension reforms • Especially a concern because of the rapid ageing of the population in LA • By 2050 there are projected to be 3 working-age individuals for every person age 65 and older, compared to 8.5 in 2010 • These demographic and epidemiological transitions place great strains on pension and health systems • NCSI programs also break the link between contributions and benefits that characterize CSI programs.

7. The co-existence of CSI and NCSI reduces the efficacy of insurance Frequent labor market transitions in LA: • Example: in Peru 21% of those who are formal salaried workers in one year are in a different labor category (informal salaried, self-employed, out of labor force, unemployed) within the next year • This has two implications: • Low contribution densities: Even in Argentina, Chile and Uruguay, mean contribution densities are low, 55%, 47% and 58%, respectively (Forteza et al. 2009) • Social insurance will do a poor job smoothing consumption between work and retirement—especially for the poor • In systems with private accounts, the value of pensions will be low • In PAYGO systems, many who have contributed will receive no pension: For example, vesting requirement for minimum pension in public pension system in Peru is 20 years: less than 50% of those who contributed will receive any pension 2. Erratic coverage against risks only covered by contributory social insurance (death, disability, unemployment)

8. A perverse incentive to informality: evidence • Because CSI is funded from wage taxes, while NCSI is funded from general tax revenues, NCSI functions as a subsidy to informality: • These effects are particularly pronounced when non-contributory programs explicitly target households who are not covered by CSI (as is the case in many LA programs) • Many examples of how NCSI increases informality: • Child benefits: • In 2009, Argentina extended the Asignación Universal por Hijo (AUH) to informal workers • By 2011 AUH covered 29% of all eligible minors at a cost of 0.64% of GDP • AUH reduced the probability that informal workers would enter into formal employment by 45% for women and 30% for men (Garganta and Gasparini 2012) • Health insurance: • Colombia’s Regimen Subsidiado is estimated to increase informality by 4 percentage points (Camacho et al. 2012)

9. A perverse incentive to informality: more evidence The effect of Seguro Popular on the affiliation of employers of firms up to 50 employees to Social Security in Mexico Note: The vertical line corresponds to the beginning of the implementation of the Seguro Popular in the first group of eligible municipalities Source: Bosch and Campos-Vázquez (2010).

10. Reforming social insurance • More so than in other sectors, policy changes need to consider how the different parts of the social insurance system fit together & interact. • Any reform needs to give careful consideration to incentives (work or retire; work in the formal or informal sectors, legal or illegal behavior). • Yet reforms are essential given the critical role that social insurance plays in protecting against risks, and in fostering social cohesion. • Reforms need to focus critically on financing, and moving in the direction of universal provision, which would imply unifying sources of finance for at least a set of common benefits. • Reform of SI should be joint with fiscal reform and look for the right balance between labor and other taxes. • Reform needs to strengthen link between contributions and benefits, and also needs to pay special attention to I/O issues (specially in health).