Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.
Chile’s pension system came under close scrutiny in recent years. This paper takes stock of the adequacy of the system and highlights its challenges. Chile’s defined contribution system was quite influential when introduced, and was taken as an example by other countries. However, it is now delivering low replacement rates relative to OECD peers, as its parameters did not adapt over time to changing demographics and global returns, while informality persists in the labor market. In the absence of reforms, the system’s inability to deliver adequate outcomes for a large share of participants will continue to magnify, as demographic trends and low global interest rates will continue to reduce replacement rates. In addition, recent legislation allowing for pension savings withdrawals to counter the effects from the COVID-19 pandemic, is projected to further reduce replacement rates and increase fiscal costs. A substantial improvement in replacement rates is feasible, via a reform that raises contribution rates and the retirement age, coupled with policies that increases workers’ contribution density.
international standards ( Barr and Diamond, 2016 ). In addition, informality and self-employment, together with low job tenure, resulted in relatively low contributiondensities and coverage.
The system’s limitations, which are expected to become even more apparent in the future, put pension reform at the center of the political debate in recent years . The introduction of the solidarity pillar in 2008, marked the beginning of a reform agenda aimed at improving the system’s fairness and overall functioning, which continues to this day, as witnessed by the 50 percent
Front Matter Page Western Hemisphere Department
II. Overview of the Peruvian Pension System
III. Methodology and Data
A. Overview of Methodology
D. SNP Pension Projections: Methodology and Assumptions
E. SPP Pension Projections: Methodology and Assumptions
A. Replacement Rates: Baseline Projections
B. Replacement Rates: Reform Scenarios
V. Policy Implications and Broader Considerations
1. Coverage of Contributory Pension Systems
only around 30 percent of the economically active population are contributing to statutory pension schemes and less than 10 percent of workers in the bottom income-quintile do. Labor informality also implies that even those workers who do contribute to the pension system only do so irregularly as they move between formal and informal employment. Low so-called “contributiondensities” in turn negatively affect the level of future pensions.
In this paper, we assess the outlook for pension adequacy (the level of pensions) in Peru, complementing a larger literature
outcomes for a large share of participants will continue to magnify, as demographic trends and low global interest rates will continue to reduce replacement rates. In addition, recent legislation allowing for pension savings withdrawals to counter the effects from the COVID-19 pandemic, is projected to further reduce replacement rates and increase fiscal costs. A substantial improvement in replacement rates is feasible, via a reform that raises contribution rates and the retirement age, coupled with policies that increases workers’ contributiondensity.
their working lives . The designers of the new pension system thought that, eventually, most workers would have a high contributiondensity (the ratio of years spent contributing to number of working-years lived). They expected this density to be at about 0.6–0.7—suggesting that workers would contribute for nearly two-thirds of their working lives. As a result, they designed the minimum pension guarantee (MPG) so that the minimum contributiondensity needed to qualify for it was significantly lower—around 0.44 for men and 0.5 for women. 9 Based on these assumptions
International Monetary Fund. Western Hemisphere Dept.
5. Theoretical Replacement Rates, by Source, by ContributionDensity
6. Pension Replacement Rates, International Comparisons
7. Simulated Effect of Reforms
1. Structure of the Pension System
2. Pension Systems in Latin America
International Monetary Fund. Western Hemisphere Dept.
conservatively assumes a contributiondensity of 75 percent, that is working-age individuals are assumed to contribute three years out of four to the pension system (and to be unemployed, outside the labor force or to work outside the formal sector during the fourth year). The model assumes that workers have perfect foresight and optimally choose whether to contribute or not to the defined-contribution pillar when they have the choice (wage-earners in brackets 1 and 2 in Figure 2 ). The projection is done in five steps:
The average wage life-cycle profile is projected for