Learning from social security reforms: Two different cases, Chile and Argentina

World Development, Vol. 25, No. 3, pp. 329-348, 1997 0 1997Elsevier Science Ltd Printed in Great Britain. All rights reserved 0305-750x/97 $17.00 + 0.00

Pergamon

PII: SO305750X(96)00105-2

Learning from Social Security Reforms: Two Different Cases, Chile and Argentina ALBERT0

ARENAS

DE MESA

University of Pittsburgh, Pennsylvania,

U.S.A.

and FABIO BERTRANOU”

University ofPittsburgh,

Pennsylvania, U.S.A. and Universidad National de Cuyo, Argentina

Summary.- This paper compares two of the most important structural reforms of social security in Latin America: the Chilean private fully funded system, and the public/private Argentinean “integrated” (pay-as-you-go/fully funded) program. Chile was the first country in the world to completely privatize the old public pension system. This landmark reform has had a strong influence on other pension reforms, not only in Latin America but also in other developing and developed countries. The Argentinian model has important differences in comparison with the Chilean model: (a) more inter- and intragenerational solidarity; (b) relatively lower transition costs to be covered by the state; (c) higher coverage of self-employed workers; (d) a more comprehensive regulatory framework, and (e) less gender inequality. Given these elements, the Argentinian pension mode1 offers new insights to countries currently reforming their pension systems. The paper concludes addressing important questions regarding the weaknesses of the new Argentinian model. 0 1997 Elsevier Science Ltd. All tights reserved Key words -

social security, pensions, public policy, Argentina,

1. INTRODUCTION One of the most important social policy issues in Latin American countries (LAC) during the 1990s has been the structural reform of pension systems. Among LAC that have implemented structural reforms of pension systems are: (a) Chile (1980-81) which introduced a private fully funded pension system based on individual capitalization accounts; (b) Peru (1992-93) and Colombia (1993-94), which adopted reforms similar to Chile’s, but maintained a parallel public system; (c) Argentina (1993-94), which created an integrated model including a reformed public system and a fully funded scheme (the latter can be managed by private and public corporations); (d) Uruguay (199596), which adopted a system similar to the Argentinian model, but closed the old public pension scheme; and (e) Mexico (199%97), which shares many features with the Chilean reform.’ Other Latin American, Eastern European, and developed countries, such as Italy and the United States, are in the process of studying or reforming their pension systems. In making the selection of a

Chile

reform model, careful consideration should be given to, among other factors, the fiscal costs of the transition, the redistributive effects and the gender inequalities created by the pension reform. This paper compares the cases of Chile and Argentina, two of the most important structural pension reforms among LAG. From here onward, they will be identified as the “private” and the “integrated” models respectively. The paper argues that the Argentinian integrated pension model could be a new referent for changes in countries that are planning to reform their pension schemes. The paper is organized as follows. In section 2 we present a comparison of the main characteristics of the Chilean and Argentinian pension systems. The

*We have benefited from the comments and suggestions of Carmelo Mesa-Lago, Verdnica Montecinos and Jan Svejnar. We also acknowledge the suggestions of two anonymous referees. Nandini Gupta and Rick Harbaugh gave us editorial assistance. As usual all disclaimers apply. Final revision accepted: September 28, 1996.

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performance of the fully funded programs in both countries is considered in section 3. Then, in section 4, we explore how much the Argentinian reform has learned from the Chilean experience. Finally, we discuss the lessons of these two cases, and we explore the implications for other developed and developing countries.

2. COMPARISON BETWEEN A PRIVATE AND AN INTEGRATED MODEL (a) Chile: The private model2 Chile, one of the pioneers in introducing social security in Latin America, established its first national social insurance fund in 1924 (Mesa-Lago, 1978; Arellano, 1985). The public social security pension system had a high redistributive potential but in practice was only moderately progressive (Foxley, Aninat and Arellano, 1980). Different studies indicate that the burden of the fiscal deficit was mostly due to the high cost of the pension system. Several administrations tried to reform the public pension system but interest groups blocked any proposal presented to the Congress. In the 1980s under a military government, extensive changes were made in Chile’s social security system. In 1980, a private fully funded social security pension system was introduced, replacing the old public pay-as-you-go scheme; it began operating in May 198 I. The new pension system is a definedcontribution scheme based on private mandatory savings/pension plan. Workers must contribute 10% of their monthly earnings during their working life to an individual account (a fixed commission to cover administrative costs is discounted from this 10%). In addition, workers pay a commission to finance insurance that covers survival and disability benefits and the costs and profits of the intermediaries. Pensions are determined based on: (i) the funds that the insured has accumulated in such account; (ii) the yield from the investment of these funds in the financial markets; and (iii) the life expectancy. For those workers that switched from the old public to the new private pension system, the state recognizes their past contributions. The acknowledgment consists of “recognition bonds” (RB), a financial instrument paid to the insured at the moment of retirement3 (see Table I ). It has been estimated that during the transition period, the RB will represent from 50% to 70% of the total capital accumulation of the insured at the time of retirement (Arellano, 1985; Arenas de Mesa and Marcel, 1993). The RB is placed in the insured’s capitalization account together with the funds accumulated during the worker’s working life-time. Then the insured can choose the retirement modality they most prefer: an annuity with an insurance company, a programmed retirement, or a combination of both. In

addition, the system provides disability and survivor pensions through private insurance companies. Pension funds and benefits are expressed in terms of unidudes de foment0 (UF), a monetary unit that is indexed monthly according to inflation. Thus, pensions are completely covered against inflation, solving a long-standing problem of the Chilean social insurance programs. Males can retire at the age of 65 and females at 60. Unlike the old public pay-as-yougo system, which entrusted the management of the pension system to public institutions, in the new system the social insurance funds are administered by private pension fund management companies (Administradoras de Fondos de Pensiones - AFPs). These private AFPs can perform only that function, i.e. the management of pension funds. The new pension system is strictly regulated by the government through a Superintendency of Administrators of Pension Funds (.Iiuperintendencia de Administradoras de Fondos de Pensiones - SAFP). Moreover, the state provides, among other guarantees, a minimum pension for all insured that have 20 or more years of contributions during the working-life period. Unlike the regular pensions, however, the minimum pensions are not indexed against inflation but are directly adjusted by the government. A typical problem with the pay-as-you-go pension systems is their tendency to incur actuarial imbalances. These result either from demographic factors or pressures to expand benefits beyond what is financially feasible in the medium and long terms. The social insurance reform implemented in Chile is an attempt to eliminate these imbalances, protect pension benefits from the ups and downs of political process and public finance, and induce positive effects on savings and capital accumulation. During the transition, however, the Chilean reform has produced significant fiscal imbalances, that will have effects for decades. Furthermore, until now, there is no conclusive evidence that the private fully funded pension system has changed the aggregate savings rate of the economy (Arellano, 1989; Marcel and Arenas, 1992; Diamond, 1994; Mesa-Lago, 1994; and Uthoff, 1995). During 1981-95, the accumulated pension funds have increased four times. In 1995, they reached U.S. $25.1 billion or 40% of GDP. The real rate of annual return of the Chilean pension funds has been outstanding, reaching an average of 12.8% in the forementioned period.4 It is projected that, under favorable conditions, the funds will reach 50% of GDP in the year 2000 and 100% in 2025. The new pension system has become a key feature of the Chilean economy and, it has had a strong economic impact, especially in the development of the financial and capital markets (Cheyre, 1988; CIEDESS, 1992; Diamond and Valdes-Prieto, 1994; SAPP, El Sistema Chileno de Pensiones 1994, 1996; Baeza and Margozzini, 1995; Uthoff, 1995; Mesa-Lag0 and Arenas de Mesa, forthcoming).

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SOCIAL SECURITY REFORMS Table 1. Pension systems reforms in Chile and Argentina - types of old-age benefits Argentina Benefit

Chile

Mixed scheme

-Pension Fully Funded (PFF) -Minimum Pension (MP)* -Universal Basic Pension (UBP) -Additional Pension (AP) -Recognized Contributionst -Recognition Bond (RB) -Compensatory Pension (CP)

PFF MP

PFF

Public scheme

UBP

UBP AP

CP

CP

RB

*In Argentina, the minimum pension was eliminated by Law 24,463 in 1995. tOnly for those workers who contributed to the old public pension system.

(b) Argentina:

The integrated model

Argentina established its first national social insurance fund in 1904 (Mesa-Lago, 1978, Bour et al.,

1994). Gradually a pension system was instituted primarily financed with payroll taxes. Although at the beginning these funds followed a capitalization program, later on the system adopted a defined-benefit scheme founded on a pay-as-you-go basis. In the 196Os, the system began to experience growing deficits that were covered by Treasury funds. The crisis deepened in the 1970s and 1980s due to factors also common in other pension systems in the region: low dependency ratio; high replacement rates (70 to 82%); lax entitlement conditions; a short period of wage averaging to determine benefits; easy access to disability benefits; and high payroll taxes that promote underreporting of income and evasion. Because of macroeconomic fiscal restrictions, the government was not able to finance pension liabilities with general tax revenues. This forced the government both to reduce replacement rates and to avoid indexation of benefits letting their real value erode. Retirees began suing the government, however, to maintain their benefits at the replacement rates stipulated by the legislation. This situation led to the accumulation of a large amount of government arrears at the end of 1991 (according to Schulthess and Demarco, 1993, more than US $7 billion or 4.6% of GDP). In September 1993 the Congress passed a bill that structurally reformed the National Pension System. Less than one year later, in July 1994, a new pension system (the SIJP-Sistema Integrado de Jubilaciones y Pensiones) began operating. The new system has an “integrated” structure (see Table 1): - A universal basic pension (UBP) that constitutes a defined-benefit scheme financed on a payas-you-go basis and paid to every worker that reaches 30 or more years of contributions; and -A complementary pension that has two modalities, a defined-benefit scheme for those workers that choose a complete publicly managed program

based on a pay-as-you-go scheme (Additional Pension, AP), and a defined-contribution scheme for workers that choose the pension system based on individual fully funded capitalization accounts (Pension Fully Funded, PFF). The UBP is specified as 2.5 times AMP0 (Aporte Media Previsional Obligatorio), which is the average compulsory pension contribution (see Appendix A for more details). The AMP0 relates to the contribution assessed on employees and is set twice each year by dividing total contributions by the number of active contributors. This means that the UBP is equal to 27.5% of the average covered wage, which should be close to the average wage of the economy. For those workers that have more than 30 years of contributions (up to 45), the UBP is increased by 1% for every additional contributed year. Hence, the maximum UBP will amount to 3 1.625% of the average covered wage. The defined-benefit AP pays to the insured 1.5% of the average indexed salary of the last 10 years of employment before retirement for every year of service to the new system (see Appendix A for the formulas used to calculate these pension benefits). The first alternative (UBP+AP) will be identified as the “public reformed” alternative while the second one (UBP+PFF) as the “mixed” alternative. Those workers that choose the latter option are allowed to make contributions to the system exceeding mandatory requirements, i.e. they constitute voluntary savings. These contributions are placed in the worker’s individual capitalization accounts receiving special tax treatment. The pension benefits funded on a pay-as-you-go basis are administered by the government through its social security agency ANSeS (Administracidn National de1 Seguro Social). The defined-contribution scheme is administered by companies created specifically to manage pension funds called AFJPs (Administradoras de Fondos de Jubilaciones y Pensiones) and supervised by a public institution, the Superintendency of AFJPs (Superintendencia de Administradoras de Fondos de Jubilaciones y

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Pensiones). The AFJPs can be established by private, public or nonprofit organizations such as workers’ unions.

(c) Chilean and Argentinian pension systems compared The Chilean case was the first structural pension reform in Latin America. It has had a strong influence on subsequent reforms in other countries of the region. Despite the perception that the Chilean system is being widely adopted, no country has fully replicated this model. We compare several features of the Chilean system with the new Argentinian model showing that important deviations can be highlighted. This section discusses the differences in: structure of the system; solidarity; transition costs and recognition of contributions to the old system; entitlement conditions and individual behavior; contributions; and the participation of the private and public sectors in the fully funded schemes (Appendix B contains a summary of the main characteristics for both systems). (i) Theprivate model versus the integrated model: Institutional Qferences It is mandatory that all workers entering the Chilean labor force be covered by a unique private program, i.e. the defined-contribution scheme based on individual capitalization accounts. In Argentina, workers can choose either to be in the public reformed system, from which he or she will receive two defined-benefit pensions (UBP and AP), or to be in the mixed system from which he or she will obtain a defined-benefit (UBP) and a defined-contribution complementary benefit (PFF). As in Chile, the level of the last benefit (PFF) will depend on the amount of funds the worker has accumulated during her/his working life-time and on life expectancy factors. In Chile the defined-contribution scheme has a minimum level guaranteed by the state, the so-called minimum pension (MP). For this reason, it is said that this system should not have been characterized as a fully “private” system. Gillion and Bonilla (1992) and Mesa-Lag0 and Arenas de Mesa (forthcoming) argue that the public sector is remarkably important in the system given the role of the state in providing: regulations; subsidies; and important guarantees (minimum pension, protection against bankruptcy of the AFP or the insurance companies). Moreover, Diamond (1996) argues that the system does not rely on unregulated market forces, i.e. the providers of private pensions are closely regulated. (ii) Solidarity According to Arrau and Schmidt-Hebbel (1994), one of the common ingredients in recent pension reforms is a more explicit separation of the distribu-

tive from the nondistributive component of the system. This is a feature that the World Bank (1994) is currently recommending to countries undertaking pension reform. Basically, the World Bank argues that old age security programs should be both an instrument of growth (by forced savings) and a social safety net. The World Bank’s proposal. however, has been criticized because it is biased against pay-as-you-go schemes and tries to tie up the issues of pension and savings, something not yet resolved among economists (Munnell, 1996). Beattie and McGillivray (1995) from the International Labour Office and the International Social Security Association. also criticize the World Bank’s report saying that the replacement of social insurance by mandatory savings schemes could imply a higher risk for workers and pensioners. Furthermore, it may imply a higher cost for protecting the old population. Therefore, they propose to “fix-up” the old systems in order to preserve the equitable characteristics they have. James (1996) from the World Bank replied to these claims arguing that the old systems look equitable on paper, but in practice, they contain a number of features that chiefly help high-income groups. Chile and Argentina have used different approaches to introduce solidarity in the system and avoid poverty among the elderly. The Chilean pension program does not have an “endogenous” mechanism to redistribute income inter- or intragenerationally; i.e. the system lacks a built-in system of implicit subsidies from high-earning to low-earning workers. As mentioned before, however. the program does secure a minimum pension, financed by the capital accumulations of the insured and general tax revenues. It is defined exogenously by the government and is not indexed automatically by inflation as the benefits of the fully funded pension scheme. On the other hand, the design of the redistributive function in the Argentinian system is completely different. It preserves the basic structure of traditional social insurance pension schemes. The UBP seeks to give a universal basic pension regardless of workers’ life-time earnings and gender (in addition to the AP or the PFF). This pension is financed by the employer’s contributions and general tax revenues, and is “endogenously” determined according to the value of the previously defined average compulsory pension contribution (AMPO). (iii) A relevant transition issue: The acknowledgment of contributions to the old system One of the main differences between the systems is how they deal with the recognition of contributions to the old system. Those workers that at the moment of the reform had contributed to the previous pension system are entitled to compensation. In the case of Chile, the government created the recognition bond. The government calculated for each worker the stock

SOCIAL SECURITY REFORMS

of past contributions to the old system and issued a bond for that amount. At the moment of retirement, the government pays this bond, which yields a guaranteed 4% annual real interest rate. In Argentina, no recognition bond was issued but there is compensation which consists of a monthly defined-benefit (Compensatory Pension, CP)5 paid by the state to those workers eligible to receive the UBP who had contributed to the old system. Contrary to the Chilean method of recognition where the stock of debt has been defined, in Argentina it is uncertain what the fiscal burden of this benefit will be. In addition, the timing of the burden for the government is also unknown because it depends on workers’ retirement decisions and other factors such as life expectancy, level of taxable wages and whether the worker is entitled to this benefit. Another distinction is that in Argentina, the recognition benefit is more restrictive because it will be given only to those workers that fulfill the entitlement conditions for the UBP, i.e. 30 years of contributions and 65/60 years old. In Chile, the recognition bond was issued to all workers that had 12 months of contributions during the last five years before the reform. In addition, in Chile, this bond pays annually a real interest rate of 4%. In sum, the Argentinian implementation of the acknowledgment of contributions to the old system seems to have a relatively lower burden for the government than the Chilean case (for a discussion of this issue, see section 4d).

(iv) Entitlement conditions and individual behavior Another source of differentiation between the systems is the entitlement requirements. While in Chile the minimum to obtain the benefit provided by the state (i.e. the minimum pension) is 20 years of contributions, in Argentina workers are eligible for pensions paid by the state (UBP. AP and CP) after 30 years of contributions.h The retirement age is similar in these two countries, 60 years for women and 65 for men. Therefore, the legislation in Argentina established seeking higher tougher entitlement conditions amounts and a longer period of contribution compliance. This also generates a strong incentive to move to the mixed scheme because workers that do not complete the 30 years of contributions will at least keep the funds accumulated in their individual capitalization accounts (see section 4~). The reformed public pension system in Argentina (UBP and AP) requires not only more years of contributions than the old pay-as-you-go system (from I5/20 to 30) but also longer periods of wage averaging (from three to 10) to determine the level of the benefits. This was a meaningful policy because it helped to avoid a distorting behavior in the labor supply; shorter averaging periods produce strong incentives to work more hours during the last years before retirement.

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Although the Chilean case does not have a defined-benefit scheme based on the average wage which might produce labor supply distortions, it does have a minimum pension which might create distorting incentives. In order to be eligible for this benefit, a worker is required to have at least 20 years of contributions and a level of funds in his/her capitalization account that impede an annuity above a minimum determined by the government. This requirement might produce strategic behavior that distorts the labor supply, inducing workers to underreport earnings and avoid contributions after 20 years. This behavior seems to be particularly optimal for those workers with low-income profiles. Wagner ( 1990) has shown that they would be better off if they did not participate in the system and receive social assistance pensions from the government. The Argentinian system also presents a potential problem of adverse selection with certain categories of workers choosing complementary pensions, both the public reformed and the mixed schemes. According to INDEC (1995), among young workers, four out of five men had chosen the mixed alternative while three out of five women had selected the same alternative. On the other hand, among workers older than age 50, three out of five men had chosen the public scheme while four out of five women had selected the public alternative. Due to the unavailability of data we could not examine the relationship between income and the option selected, however, we expect high-wage workers to choose the mixed scheme while relatively low-paid workers the public scheme. (v) Contributions and commissions The Chilean reform eliminated the employers’ contribution and reduced from 19.6% to 10% employees’ contribution, which is fully capitalized in the insured accounts after a deduction of a fixed commission by the AFPs. In addition, insured workers pay a variable percentage commission for premiums for disability and survivor insurance and administrative expenses. On the other hand, contributions in the Argentinian case were not changed, remaining at 16% for employers and 11% for employees. Beginning in 1995, in some sectors and/or regions of the country, the employers’ contribution has been reduced; as a result the estimated country average employers’ contribution rate is currently between 12% and 14%. The employers’ contribution finances the universal basic pension (UBP), which does not exist in the Chilean system. When the worker selects the public reformed option for her/his complementary pension, her/his contribution finances the additional pension (AP) for staying in the public program. Alternatively, for those who choose the mixed scheme, the 11% of contribution is placed in individual capitalization accounts after the AFJP have deducted their commissions. As in Chile, the allowed structure of these fees consists in

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a fixed amount and a proportion of the taxable incomes (variable percentage commission). Therefore, the amount of contributions capitalized in individual accounts is larger in Chile (9.9%, i.e. 10% minus fixed commission) than in Argentina (7.5%, i.e. 11% minus fixed and variable commission). The higher level of workers’ and employers’ contributions in Argentina certainly imposes further costs on the economy. It is beyond the scope of this paper to discuss what has already been widely documented in theoretical and applied economic literature: high payroll taxes do have an adverse effect on employment and growth. The current burden of the pension system for society is, however, similar in both countries. According to Schulthess (1994), the Argentinian ratio of Social Security Expenditures to GDP reached 5.2% in 1994; while for the same year, in Chile, this ratio was 5.8% (Direction de Presupuestos, 1996). In Argentina, those workers that are registered as self-employed have a mandatory contribution of 27%, i.e. the equivalent of the sum of both the salaried employers’ (16%) and employees’ contributions (11%). This represents two important differences with respect to the Chilean case in which: self-employed workers’ coverage is not mandatory; and selfemployed and salaried workers contribute the same rate. The significant gap in contribution burden between self-employed and salaried workers in Argentina produces high incentives to those selfemployed for evasion or underreporting of income, specially because only 11% of the 27% contribution is allocated to their individual accounts in the fully funded scheme. The fact that affiliation is mandatory for self-employed workers in Argentina, however, has led to a higher degree of coverage in this group of the labor force (see section 4b). (vi) The role of the private and public sectors in the fully funded schemes Even though the Argentinian individual fully funded scheme was based on the Chilean experience, differences remain. The main distinctions refer to the role of the public sector in the management of pension funds, the institutions responsible in the collection of contributions and the set of regulations for portfolio composition and minimum required profitability. First, some similarities will be highlighted. In both systems, Pension Fund Management Companies (AFP/AFJPs) are highly regulated, requiring the creation of new public institutions to oversee them; in Chile the Superintendency of AFP (SAFP) and in Argentina the Superintendency of AFJP (SAFJP). Each company manages a single fund, allocating the complete return of the fund to the individual accounts. In addition to the old-age pensions, the AFPs and AFJPs provide disability and survivors’ benefits through private insurance companies. These types of insurance are tightly regulated by the government.

There are two major differences related to the role of public institutions in the system. The first one refers to the participation of public institutions in the sector of AFP/AFJPs. In Chile only private corporations, constituted specifically for this purpose. can manage pension funds. In Argentina not only private but also public and nonprofit organizations are allowed to constitute Pension Fund Management Companies (AFJPs). Moreover, the law that reformed the system stipulates that the main state-owned bank (Bunco Nacidn) has to constitute a Pension Fund Management Company that operates under the same conditions. This state-owned AFJP, however, must invest a proportion of its fund (20%) in credits or investment for the regional economies. Another differentiating feature refers to who collects the contributions. In Chile, the contributions are directly collected by each AFP, i.e. all employers have to deduct their worker’s contributions and pay them to each AFP according to the affiliation of the worker. This has made the system administratively costly, especially for employers that do not have computerized systems. In Argentina, the contribution collection system has been centralized in a public institution that transfers the payroll deductions to each AFJP. In case the insurance companies fail to pay oldage, disability or survivors’ pensions, both systems guarantee these payments by the state. In Argentina, the maximum limit guaranteed on pension fund insurance is five times the UBP. Another guarantee that the state regulates is the minimum level of relative pension fund profitability. The minimum return requirement is set in relation to the average performance of all pension funds. This requirement aims to insure against excessive fluctuations in pension fund returns and from wide dispersions between different AFP/AFJPs. In Chile, the limits are expressed in real terms (the minimum between the 50% of the average return or two percentage points lower than the average return). In Argentina they are set in nominal terms (same as Chile but at 70% of the average return). When an AFP/AFJP is not able to make up a shortfall in the rate of return from its profitability fluctuation and investment reserves, it will be forced into liquidation. If this is the case, the state transfers the pension funds to another AFP/AFJP.

3. PERFORMANCE

OF THE FULLY FUNDED SCHEMES

It was shown in Table I that both systems provide a defined-contribution benefit (PFF) based on individual fully funded capitalization accounts. Although the new Argentinian system has been recently established (1994), this section will give a preliminary comparison and evaluation of the performance of the fully funded scheme in each country.

SOCIAL SECURITY REFORMS

(a) Coverage Traditionally, both Chile and Argentina have had a relatively high degree of social security coverage among the countries in the region. The fully funded programs, however, have deepened a phenomenon that existed in the old pay-as-you-go schemes: a low rate of compliance in contribution. The high rates of affiliation to the systems are offset by low rates of compliance in contribution. Data provided by the SAFP, El Sistema Chileno de Pensiones (1994, 1996) in Chile indicate that the rate of affiliation is 95% (affiliates/labor force). But the real coverage (contributors/employed labor force) is much lower (60%) while the rate of noncontribution (noncontributars/affiliates) is 44%. In Argentina, this last indicator seems to have a better performance, 42%; but the rate of affiliation is approximately 70% and the real coverage 54%. (b) Capital accumulation and rate (tireturn qf pension funds The success of the Chilean pension system, instituted 15 years ago, is generally evaluated in terms on the exceptional yields of its portfolio. An average real investment yield of 12.8% (1981-95) has allowed a remarkable accumulation of funds reaching $25. I billion dollars, equivalent to 39.9% of GDP in 1995. Approximately 61% of the accumulated fund in 198 l-95 was explained by the high yield of the investments, while the remaining 39% was based on contributions. According to Diamond and Valdes-Prieto (1994) and Diamond ( I996), the substantial yields of these pension funds are attributable to the extraordinary high rates of return of the Chilean economy over the past 15 years. Although it is somewhat premature to evaluate the evolution of the pension funds accumulation and its real rate of return, the Argentinian system has had an outstanding start. The real yield of pension funds reached 17.8% in 199.5, and the accumulated pension funds at the end of that year was $2.49 billion dollars, equivalently to 0.9% of the GDP. This has been a fact of paramount relevance for the confidence in the system, especially since the fully funded scheme is not compulsory as in Chile. The mixed scheme has 65% of the total affliates to the integrated pension system, indicating not only that new entrants to the labor force are choosing this option but also that a Iarge proportion of workers are switching from the public scheme (SAFJP, 1996). (c) Administration

and concentration

A distinguishing feature of both pension systems is the role of the state in the market of Pension Fund Management Companies (AFP/AFJPs). While in

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Chile state participation is banned, in Argentina public institutions are allowed to constitute or participate in AFJP. The Banco Nacio’n’s AFJP, owned by the largest state bank, is one of the most important in the sector. Other public institutions such as Provincial Public Banks also have stakes in AFJPs. These public or public-related AFJP, competing under the same set of conditions than those privately managed, have performed very well in terms of number of workers affiliated and the rate of return of the pension fund. In general, the investment yield for these AFJP has been close to the average of the system. For instance, the Bunco Nacin’n AFJP had 9.9% of total affiliation at the end of 1995, while the real rate of return of its fund for that year was 14.5%. In both countries, the fully funded programs have been designed to promote competition among the AFP/AFJPs in order to improve pension funds management, reduce administrative costs, and provide higher and better pension services. These goals, however, have not been completely achieved according to data which show: (i) concentration of affiliation in few AFP/AFJPs; and (ii) lack of competition based on commissions charged to affiliates. In the last two years, the number of AFP/AFJPs has been shrinking in both countries, thus deepening the process of concentration. Table 2 shows that the three major Pension Fund Management Companies represent 68.9% of the affiliates in Chile and 39.9% in Argentina. The largest six AFPlAFJPs represent 85.1% and 68.7% respectively. The commissions usually charged by these major AFP/AFJPs are not the lowest offered in the market. Moreover, in Chile, these major AFPs do not have the highest rate of return on their pension fund investments. Thus, it appears that there are other factors such as publicity (marketing and sales agents) and reputation of the owners of these institutions (for instance, corporations and banks) playing an important role in worker’s affiliation. On the other hand. the system does provide better pension services. For instance, delays in benefit payments have been reduced, a problem that has disproportionally affected lowincome groups.

(d) Investment The portfolio composition of the AFP/AFJPs is strongly regulated. In general, the legislation establishes limits for each possible financial instrument in which these companies can invest. These limits have been changing according to the new circumstances, particularly in Chile, where the system has been operating since 198 1. For example, in 1992 investment in foreign assets was permitted and in 1994-95 new financial instruments were allowed (see Table 2).

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Table 2. Thefullyfundedprogram

in Chile and Argentina: 1995 (December)

1. Number of insured - Employees - Self-employed - Both - Undefined -Women

Chile

Argentina

5,320,913 97.2% 2.8%

4,179,242 52.3% 9.8% 1.2% 36.5% 26.6%

39.6%

2.

Contributorsilnsured

56%

58%

3.

Funds accumulated (billions) Funds accumulated/GDP

US$25.1 39.9%

USS 2.5 0.9%

4.

Average real investment yield

12.8% (1981-1995)

17.9% (1995)

5.

Number of Pension Fund Management -When the system started - 1995

6.

Number of insured per sales agents

7.

Number of changes between AFP/AFJP (Insured changes/Contributors)

8.

Investment -Public Securities - Mortgages -Enterprise Bonds - Certificated Deposits - Stocks - Shares in Mutual Funds -Foreign Securities and Stocks -Regional Projects (Banco Nacio’n)

Companies 11 16

Limit 50% 50% 45% 50% 37% 10% 9%

356

388

44.6%

16.7%

Portfolio 39.4% 15.8% 5.2% 7.0% 29.4% 3.0% 0.2%

Limit 50% 28% 28% 28% 35% 15% 10% 20%*

3.04% 0.70% 2.34%

10 Commissions - for disability and survivors insurance -for administrative costs+ 11, Distribution of insured and total pension fund (largest AFP/AFJPs considering number of affiliates)

25 21

AFP Provida Habitat Sta. Maria Summa Union Plan Vital First three First six

Insured % 31.3 19.6 18.0 6.0 5.9 4.3 68.9 85.1

Portfolio 52.7% 5.3% 8.7% 24.7% 5.8% 1.7% 0.7% 3.8% 3.56% 0.96% 2.60%

Fund % 20.4 16.8 14.6 7.6 4.6 2.3 51.8 66.3

AFJP Consolidar Maxima Siembra Origenes Nation Previnter First three First six

Insured % 13.9 13.3 12.7 10.8 9.9 8.1 39.9 68.7

*This is a minimum level of investment required only to the public AFJP Bunco Nacidn. tin Chile, the insured is additionally charged a fixed commission by the AFP (= 0.1% in 1995). The commission istrative costs shown for Argentina already include the fixed component. Sources: Authors’ estimations based on SAFP Bolefin Mensual(l996) and SAFJP (1996).

In general, the limits have been defined to reduce risk through diversification of the portfolio, and to finance the transition by making public securities the most important financial instrument of the portfolio. Another reason for establishing limits is to protect the financial markets in which the AFPIAFJP trade securities. The aim is to prevent market dominance by any individual AlWAFJP. For instance, in Chile, in order to avoid dominance in the share holding meeting by a

Fund % 16.2 13.7 14.7 8.8 7.8 9.4 44.6 70.6

for admin-

particular AFP, the share holding limit for outstanding equities of a public company is 7%. From Table 2, it can be seen that currently Chile allows higher maximum limits for investment in different instruments than Argentina. Public and foreign securities, however, have a higher limit in the latter (in Argentina, the state-owned AFJP Bunco Nacidn is required to invest at least 20% in securities of regional economies). These differences can be explained by

SOCIAL SECURITY REFORMS

the maturity of the reform. After 1.5 years, Chile has accumulated a considerable pension fund and its capital market seems to be less volatile than Argentina’s, Furthermore, in Argentina allowing public sector bonds in the AFJP’s portfolio has been of paramount relevance to financing the deficit that in the short run is created by the transition from the old to the new pension system.

4. LEARNING FROM THE CHILEAN EXPERIENCE AND WEAKNESSES OF THE ARGENTINIAN SYSTEM The scope and results of the changes introduced by Chile’s 1981 reforms have attracted worldwide attention. This is because Chile was one of the pioneer countries in the development of social security in Latin America, its pay-as-you-go system had reached both a mature stage and virtual universal coverage of the labor force, and it was the first structural reform in the world that replaced and privatized the traditional public pension scheme, the most representative pension system worldwide (SSA, 1995). Fifteen years after the privatization of the pension system in Chile, it is feasible to examine empirically the effects of these changes, focusing on the system’s advantages and unsolved problems.

(a) Advantages and unsolvedproblems Chilean scheme

of theprivate

The social security pension reform in Chile has generated micro and macroeconomic advantages. In terms of operation and regulation of the new private system, the main microeconomic advantages are (Diamond and Valdes-Prieto, 1994; Baeza and Margozzini, 1995; Mesa-Lag0 and Arenas de Mesa, forthcoming): indexation of the pensions in accordance with inflation; standardization of entitlement conditions; elimination of privileges; reduction of delays in the payment of benefits; low wage-tax for pension insurance (rate of contributions); and freedom to choose a company to manage the pension funds. Among the noteworthy macroeconomic advantages are: a high real rate of return of the pension funds; isolation of the pension system from political risk and public budgets (except for the minimum pensions); and development of the capital and financial markets. There are unsolved problems and new puzzles created by the privatization of the pension system. The main problems are: 45% of the total insured are not paying contributions regularly; low coverage in the informal labor sector, the coverage of the self-employed being only 10% in 1995 (1.2 million self-employed workers are not covered by the fully funded pension system); different pension benefits by gender, women receiv-

331

ing lower benefits than men; in 1995, the three largest AFPs accounted for close to 69% of the affiliates and 52% of the pension funds, equivalent to 20% of the GDP; the selection of AFPs by the insured is highly determined by the influences of sales agents and not by the investment yield and level of commissions that the AFPs charge (45% of the contributors changed AFP in 1995); administrative costs which are higher than the costs of the inefficient old public system; the affiliates receive very sophisticated information that is not useful to guide them in choosing the most convenient AFP; and the huge public deficits created by the reform (4.7% of GDP in the 1990s).

(b) The Argentinian integrated model: Learning from the Chilean experience After 15 years of operation of the private pension system in Chile, there are some important lessons to be learned from the Chilean experience. The Argentinian pension reform of 1993 reveals this learning experience. Among the elements that distinguish the Chilean from the Argentinian reform are: transition costs; solidarity and coverage; administration and regulation; and gender inequalities. (i) Transition costs The social security pension reform potentially creates a considerable public deficit. The main variables that explain this deficit are: the decline in social security revenues after the reform because part of the contributions are collected by the private sector while the government has to continue paying benefits to pensioners of the old public scheme; the acknowledgment of past contributions to the old public pension system; and the UBP (in Argentina) and the minimum pension (in Chile) paid by the government. As we mentioned before, in the Argentinian case the employee’s contributions go either to the AFJP (mixed scheme) or to the publicly managed pay-asyou-go scheme. The contribution that the AFJP received in 1995 reached more than $2.3 billion (0.9% of GDP). The government must cover the lost revenues by increasing revenues from other taxes or issuing public debt, or a combination of both. The decision of how the government finances the deficit created by the pension reform, will certainly be one of the most important factors determining different paths of capital accumulation and intergenerational distributional effects.7 The costs of the transition in Argentina, however, should be relatively lower than in Chile. This is because Argentina did not follow its neighbor in this matter. The employees’ rate of contribution to the pension system was left unchanged while in Chile it decreased for those workers that switched to the fully funded scheme. The employers rate of contribution

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WORLD DEVELOPMENT

was eliminated in Chile, but in Argentina it continues at the same level as before. These resources certainly will increase the capacity of the government to finance the transition. As we explained in section 2c, the acknowledgment of past contributions took different forms in Argentina and Chile, implying that the nature of the fiscal responsibility is different in each country. In Chile, a lump-sum is paid at the time of the insured’s retirement, while in Argentina payment consists of a flow that begins at retirement. Given that pensioners have different and unknown life expectancy, the payment of this stock means that the government takes into consideration all the costs of making a huge transference to the AFPs and the private insurance companies. Moreover, the payment of the RB as a stock creates a liquidity problem in the fiscal budget leading to further financial restrictions. On the other hand, it is unclear whether the Argentinian solution implies a lower or higher cost for the government. To estimate the costs, one would have to compare the implicit debt on pension payments of the old system and the future liabilities created by the compensatory benefit (CP). What is clear is that the government will not have to face the same liquidity problem produced by the Chilean system. All these elements imply that the transition costs of the acknowledgment of past contributions would be lower in relative terms for Argentina. The Chilean government annually paid in recognition bonds an amount close to 0.6% of GDP in 199&94 (SAFP, El Sistema Chileno de Pensiones, 1996); in the next 15 years, it will annually pay between 1% and 1.2% of the GDP (Arenas de Mesa and Marcel, 1993). Another cost of the transition is the minimum pension (MP) guaranteed by the state. In the case of Chile, these pensions are financed by both the insured’s capital accumulation in their individual accounts and general taxes. In Argentina, the UBP is financed not only by general taxes but also by employer’s contributions. The latter case creates “solidarity within the system,” an element that is not present in the fully funded Chilean pension system (see next section). In Chile, it is estimated that the annual expenditures for the stateguaranteed minimum pension will be close to US $60 million at the end of this decade; another source indicates that it would be in the long run 3% of GDP (Arellano, 1989; Zurita, 1994). (ii) Solidarity and coverage The solidarity in the new integrated system of Argentina is built within the system while in Chile solidarity is outside the pension program. The minimum pension paid in Chile is basically financed by the affiliate through his/her accumulated pension fund. The government finances the difference between the pension level reached by the insured and a minimum level

previously determined. These expenditures are financed with general taxes. In Argentina, the provision of the universal basic pension has a more progressive financing scheme, with both employers’ contributions and general taxes. Moreover, the Argentinian scheme maintains the pay-as-you-go pension scheme that potentially generates social solidarity among generations and risk-sharing within a generation of workers. Thus, this system favors lowincome workers and women (see sections 4b and 4~). There is, however, an on-going debate regarding whether the public reformed scheme would produce financial and actuarial disequilibria in the near future. In relation to the solidarity of the pension systems, population coverage is a relevant issue. After 15 years of operation of the Chilean fully funded pension system, the coverage of low-income groups and selfemployed workers is still a problem. More than 1.2 million self-employed workers are not covered by the pension system. One of the causes explaining this low coverage is that the participation of the self-employed is voluntary (SAFP, El Sistema Chileno de Pensiones, 1996). In Argentina, workers’ participation is mandatory. Moreover, the tax administration has created a system of unique individual tax identification for income and social security taxes. This is one of the most important reasons explaining that more than 1.7 million self-employed workers were affiliated to the integrated pension system by June 1995. Before the reform, only 0.79 million self-employed workers were making contributions (Posadas, 1994; INDEC, 1995). Another open question of the integrated Argentinian pension system is whether 30 years of contributions to obtain the public benefits (UBP, AP and CP) is an overly restrictive requirement, especially for low-income groups and women. For example, in the case of a woman with college-level education, 30 years of contributions would be equivalent to 86% of her active working-life period. Considering that low-income workers and women have lower rates of participation in the labor market and are more likely to be affected by unemployment, it is unclear if these groups will be able to receive benefits of potential solidarity within the pension system. Moreover, this tough requirement of entitlement for the UBP, AP and CP benefits can affect the real coverage of the population in the new integrated pension system. These workers that do not comply with this requirement will not receive old-age insurance. This is another reason why the worker has strong incentives to choose the mixed system instead of the pure public alternative. If the worker prefers to stay in the mixed model, at least he/she will receive benefits from the pension savings in the capitalization accounts. In the fully funded pension system there are no requirements for years of contributions necessary to obtain benefits. The only condition that needs to be

SOCIAL SECURITY

fulfilled is that male beneficiaries females 60.8

be 65 years old and

(iii) Administration and regulations The Argentinian mixed pension scheme allows for the participation of both public and private corporations in the management of the pension funds. Besides the minimum investment yield required by the SAFJP, one of the purposes of the publicly managed AFJP Nucidn is to provide a minimum rate of return for the pension fund equivalent to the interest rate for deposits in its savings accounts. This guarantee is exclusively for the public AFJP, driving the other AFJPs to offer an investment yield equal or higher than that minimum level. In the Chilean case the AFPs are exclusively managed by private corporations, and although in the last 15 years they have shown high annual real rates of return of pension funds (12.8% in 1981-95), in three years (1984, 1992 and 1995) these returns have been lower than the return offered by the banking sector to their savings accounts. Moreover, in 1995, the return was negative: -2.5%. The Chilean pension system’s mechanism to collect contributions has also offered some valuable lessons. In Chile. each AFP has to collect the contributions of their affiliates. This system is clearly less efficient than a centralized mechanism. In Argentina, a public institution collects all social security taxes, even those for the fully funded program; thus the costs for these activities are assumed by the government. In Chile, the AFPs have opposed any change in the collection system, arguing that a public institution might delay the transfer of their affiliates’ contributions, producing a financial cost. The AFPs are also concerned about the potential mismanagement by a public institution of the information derived from the collection of contributions. Moreover, it is not clear who would finance this new public institution - the insured, the AFPs or the government. There is no doubt that the centralization of the collection of contributions has major advantages in terms of economies of scale, i.e. decreasing the average cost of collection. Finally, in Chile during the transition from a public to a private pension scheme, AFP’s marketing was not optimally regulated and information about the performance of pension management companies was not properly given to the insured. During the 1980s it was common to see more than one AFP advertising its services as having the highest rate of return in pension funds. Different definitions of the real rate of return, based on before or after commissions or on differing lengths of time allowed more than one AFP to claim the highest investment yields. At the beginning of the 1990s. a set of regulations was designed to standardize the definition of investment yield that the AFPs could use in advertising (SAFP, El Sistema Chileno de Pensiones, 1994). In Argentina, rules on marketing were designed before

339

REFORMS

the new system was launched. For instance, the AFJPs cannot advertise their services before they are officially approved by the SAFJP. It seems that strict regulations about marketing and information that the AFP/AFJPs can provide to participants are of primary importance to prevent the concentration of affiliates in a few pension fund management companies. This may create a more competitive private market for pension fund management. (iv) Gender inequalities The switch from the public pay-as-you-go pension scheme to a fully funded pension system can be characterized as a change from a “gender neutral” system to one with “gender differentiation.” Unlike the public schemes that give the same benefits regardless of the sex of the affiliates, fully funded schemes pay benefits which explicitly include life expectancy factors by gender. Therefore, those who live longer (women) obtain on average lower benefits than those with shorter life expectancies. In this context, the reform of the pension system is said to introduce “gender inequalities.” For instance, in Chile, assuming an equal record of wages and years of contributions by gender, women who retire at 60 would obtain 52% to 76% of the pension received by males. Women who retire at 65 would obtain between 86% and 90% of the pension that men would receive (Arenas de Mesa and Montecinos, 1996). In Argentina, the reformed public pension system alternative is gender neutral, given that the formula to estimate benefits and the requirements to obtain benefits do not differentiate by gender. The same benefits are provided, regardless of the gender of the affiliates. Hence there is an implicit subsidy from men to women given that both contribute the same rates but women receive pension benefits for longer periods because they have earlier retirement ages and longer life expectancy. In the mixed scheme, the UBP has the same characteristics; i.e. it is gender neutral. But the benefits from the fully funded scheme (PFF) have the same characteristics which exist in Chile. According to Isuani, Rofman and San Martin0 (1996), women will obtain 10.5% lower benefits than men in the mixed scheme.” Therefore, we can conclude that gender was also a missing factor in the discussion of the Argentinian mixed reform, a policy lesson that was not learned from the Chilean experience.

(c) Salary replacement rates What are the implications of the “gender inequalities” discussed above? The main consequence is that salary replacement rates differ by gender. According to CIEDESS (1992), in Chile, women’s replacement rates would be between 52% and 57% and men’s rates would fluctuate between 81% and 86%. This study

340

WORLD DEVELOPMENT

assumed a 5% annual rate of return of pension funds; and 90% and 93% of contributions during the active working-life period. Assuming lower contributions (70% of the active working-life) and the same annual investment yield, women’s rates of replacement would be between 32% and 46%, while for men the rates would be between 58% and 83% (Arenas de Mesa and Montecinos, 1996).‘O In the case of Argentina, there are two salary replacement rates to consider: the salary replacement rate in the reformed public scheme (this rate is defined by law); and the rate of replacement in the mixed pension system. Both have two components: the UBP, and the complementary pension (PFF, for the individual capitalization scheme; and AP for the public reformed alternative). Table 3 shows the salary replacement rate for the mixed pension model for an affiliate who starts to work at the age 20 and retires at 60 (women) or 65 (women and men).” From these estimations we can observe three main facts: (i) women obtain lower replacement rates than men, even in the case when women retire at age 65; (ii) women are penalized if they retire early, obtaining higher replacement rates if they retire at age 65 than at age 60; and (iii) for women and men, when the rate of return of pension funds and the density of contributions (years of contributions as a proportion of the total years in the working-life period) are high, the salary replacement rate increases. In Appendix C we include the methodology used to estimate pension benefits by gender in the fully funded scheme. In the public reformed pension system the salary replacement rate does not depend on the rate of return, it just depends on the years of contributions of the affiliates. Affiliates obtain benefits if they have 30 or more years of contributions. From Table 4, the fol-

lowing can be inferred: women and men obtain the same replacement rate, even if women retire at the age of 60: women obtain the same replacement rate if they retire at 60 or 65: if affiliates (women and men) do not have 30 years of contributions they are not entitled to benefits from the public reformed system (i.e. zero replacement rate). As mentioned before, the public reformed system is gender neutral; however, 30 years of contributions imply a higher density of contributions for women, when they retire at the age of 60, than for men. If they retire at the age of 65, the requirements in terms of density of contributions are the same

for males and females. When we compare the mixed and the public reformed pension systems (Table 5) we conclude that: if years of contributions are lower than 30, then women and men would be better off in the mixed scheme than in the public reformed scheme; if the years of contributions are equal or higher than 30 then women would be better off in the public reformed pension system. Women would be better off, however, in the mixed model if they retire at 60 and the annual rate of return during their working life period is higher than 6.4%, or if they retire at 65 and the annual rate of return is higher than 5.1 c/c.‘?Men would be better off in the mixed model if the annual rate of return of the pension funds is higher than 4.5%.

(d) Comprehensiveness

of the reform

In both countries, the pension reform has excluded some sectors. That is, there are still sectors that have their own pension schemes. In both countries, the Armed Forces and the police still have special regimes. The political power of these groups, especially in Chile where the authoritarian regime of

Table 3. Salad replacement rates by gender in Argentina: Mi.xedpension scheme*

Yield 5% 5% 5% 4% 4% 4% 6.4% 6.4% 5.1% 5.1% 4.5% 4.5%

Density of contributions+ 90% 75% 61% 90% 75% 67% 75% 88% 67% 78% 67% 78%

Women Retirement at 60

Women Retirement at 65

Men Retirement at 65

66.6 59.8 56.3 58.2 53.1 50.4 72.5 81.4

86.6 76.7 71.5 72.8 65.2 61.2

96.3 84.9 78.7 80.2 7 I .4 66.8

72.5 81.4 72.5 81.4

*The salary replacement rate includes the proportion that corresponds to the universal basic pension. The replacement the universal basic pension is equivalent to 27.5% of the average wage (see Appendix A). tpercentage of the total working-life years that the insured make contributions to the system.

rate of

SOCIAL SECURITY

Table 4. Salary replacement Years of contributions O-29 30 35 40 45*

rates by gender in Argentina:

Women Retirement at 60

Women Retirement at 65

0 12.5 81.4 82.8 84. I

0 12.5 x1.4 82.8 84.1

*In the case of women that retire at age of 60,45 years of contribution tions at 15 years old. Table 5. Comparison

Years of

contributions o-29 30-35

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REFORMS

Public reformed scheme

Men Retirement at 65 0 12.5 81.4 82.8 84.1

imply that the insured has to begin making contribu-

between the public reformed and the mixed schemes in Argentina: higher salary replacement rates by gender?

Which pension alternative

offers

Men Retirement at 65

Women

Women

Retirement at 60

Retirement at 65

Mixed Public (if r < 6.4%/c)*

Mixed

Mixed

Public (if r < 5.1%)

Mixed (if r > 4.5%)

*r is the annual real investment yield of pension funds.

General Pinochet ruled the country at the time of the reforms, allowed them to keep their special regimes. Although in both countries the number of insured in these systems is not significantly large, it generates a “demonstration effect” that undermines some of the principles of these reforms, such as standardization of entitlement conditions and elimination of privileges. The case of Argentina is particularly important because, besides the Armed Forces and the police, there is a large proportion of insured workers ruled by special legislation. Provincial systems and alternative funds (usually belonging to professionals) coexist with the national social insurance system.” These systems were not affected by the reform legislation passed by the National Congress because they are governed under provincial laws. The retirement reciprocity system, however, was modified to eliminate individual strategic behavior at the age of retirement. This system, which has functioned since 1946, enables individuals to transfer from one system to another without losing the years of contributions required to be entitled to a pension benefit. The provincial pension systems insure public servants of the provincial and municipal governments. At the moment of the reform of the national pension system, each of the 23 provinces and the Municipality of Buenos Aires had a defined-benefit pension system for their workers based on a pay-as-you-go scheme. Similar to the old national pension system, most of these provincial pension funds suffer from huge financial disequilibria. According to Broda y Asociados (1995), the consolidated financial disequilibrium of these systems was $1.3 billions dollars in 1995, equiv-

alent to 0.5% of GDP. In addition, FIEL ( 1995) has estimated the actuarial balance of 13 provincial systems where the most important provinces are included, and all of them present serious disequilibrium. Why is the crisis in the provincial pension systems an important issue in Argentina? There is a two-fold problem to consider: first, the advantages of having a unified pension system in the country; and second, the new denotation of fiscal responsibilities of the national and provincial governments for providing and financing social services in the 1990s. While the latter issue has significant implications for the redefinition of fiscal federalism in Argentina. it is beyond the scope of this paper and we discuss in this section only the former issue. In 1994 provincial public sector systems insured approximately 1.3 million workers and 0.6 million pensioners (Sierra, 1994; Broda y Asociados, 1995). In general, the rates of contribution for employees and employers (in this case the provincial states) are higher than those in the national pension system. Moreover, all the systems have different rates of contributions depending on whether the worker is an employee in the “general regime”, a teacher, a legislator, a judicial worker, a policeman/policewoman, or a worker with hazardous duties. Entitlement conditions differ greatly for each type of worker, but in general have been less stringent than in the national pension system. Furthermore, the average benefits paid by provincial systems have been higher than in the national pension system. The national government has offered the provinces a plan to absorb their pension systems which allows

342

WORLD DEVELOPMENT

them to be rid of the deficit while keeping the entitled benefits for current pensioners. Since current pensions are not affected, the transfer of the system is made politically viable. In brief, a unification of these systems under the nationally integrated pension system would provide the following advantages: (i) better mobility conditions in the labor market; (ii) standardization of entitlement conditions; (iii) more fairness in terms of the level of pensions given by the public sector; (iv) alleviation of fiscal pressure on provincial budgets produced by the deficit of their pension systems; and (v) avoidance of a federal bailout.

In Argentina, the public reformed pension scheme is structured on a pay-as-you-go basis that could generate the same financial problems as the old pension system. Pension benefits are financed with employers’ contributions and general tax revenues, which creates uncertainty regarding the ability of the govemment to collect resources to finance such liabilities. Moreover, the new system is operating without the accumulation of reserves necessary to make future payments of the AP component in the reformed public scheme. Schulthess and Demarco (1996), however, have presented simulations where the liabilities that the AP component would create in the future are not significant. They have estimated that in the year 2000 it would represent only 2.5% of total expenditures of the new integrated system, while it would reach 4.8% in 2010 and 5.3% in 2020. The bulk of the expenditures will be demanded by the compensatory (CP) and the universal basic pensions (UBP). One of the responses to the factors that raised doubts about the financial viability of the public component was the Pension Solidarity Law of March 1995. The main features of this piece of legislation are: (i) it restricts the future cost of the system by eliminating the automatic indexation according to the value of the AMPO, and linking pensions to adjustments approved in the annual budget; (ii) it eliminates the minimum pension guarantee; (iii) it limits the aggregate monthly pension that a pensioner can receive under the new public scheme; and (iv) it allows different rates of adjustment between lower and higher pension beneficiaries (Schulthess, 1994). The positive impact on the financial viability created by the Pension Solidarity Law is not cost-free. The new legislation introduces something that the reform had tried to eliminate: political discretion in the definition of indexation mechanisms and arbitrariness in allowing different adjustment for lower and higher pension beneficiaries. Despite the modifications introduced by the Pension Solidarity Law, it is not clear whether the reformed public scheme will be free of future financial problems.

The main drawback of these new legal provisions is that the determination of the future level of pensions is now a pure policy decision, hence pension levels will be susceptible to political considerations. This is what Diamond (1996) and Mitchell and Zeldes ( 1996) highlight as an important strength of the Chilean privatized pension systems. The minimum pension in Chile, however, can be arbitrarily modified by the government.

5. CONCLUDING REMARKS AND GUIDELINES FOR FUTURE PENSION REFORMS This paper compares two of the most important structural social security pension reforms in Latin America: the Chilean private fully funded pension scheme and the Argentinian integrated (pay-as-yougo/fully funded) pension system. Chile was the first country in the world to completely privatize the old public pension system. This landmark reform has had a strong influence on other pension reforms, not only in Latin America but also in other developing and developed countries. While the Argentinian pension reform was approved under a democratic government, in Chile, the reforms were instituted under an authoritarian regime. Before its approval, the Argentinian project was discussed with unions, social organizations, political parties, and finally passed by the Congress. This democratic environment was one of the most important factors explaining why the Argentinian public pay-as-you-go system was reformed and not completely substituted, as in Chile. We argue that the Argentinian model has important deviations and improvements in comparison with the Chilean scheme. Among them, we can mention the following: (i) Inter- and intragenerational solidarity, particularly through the additional benefit (AP) paid by the public reformed scheme and the universal basic pension (UBP). (ii) relatively lower transition costs created by the reform. The mechanism to acknowledge past contributions and the maintenance of the employer’s contributions would decrease the burden of the reform on public budgets. (iii) The mandatory participation of salaried and self-employed workers will probably result in higher coverage. In Chile, participation is voluntary for self-employed workers, (iv) Regulation of the pension system: from the beginning marketing regulations have been more restrictive; management is entrusted to public and private corporations in the case of the mixed model; collection of social security pension taxes is centralized in a public institution that generates economies of scale with decreasing average costs of collection; and the rate of investment return in

SOCIAL SECURITY

the fully funded scheme is not only regulated by the Superintendency of AFJP, but also the govemment has an agent in the system (the public AFJP Banco Nacidn) that produces signals to other AFJPs. The AFJP Banco Nucio’n pays its affiliates a minimum yield equivalent to the interest rate that an investor obtains in savings accounts. (v) The gender inequalities are partially addressed; the public reformed scheme pays similar pensions regardless of the gender of the insured. As in Chile, the mixed model, however, introduces gender inequalities. This is because the estimation of pension benefits considers life expectancy factors by gender. The characteristics mentioned above make the Argentinian pension reform an attractive model to countries considering structural pension reforms. There are some important questions, however, regarding the weaknesses of the new Argentinian model. Among them are: -The financial viability of the integrated pension system. The public reformed pension scheme is a pay-as-you-go pension system that could end up with the same financial problems as the old pension system. The pension benefits paid by the public sector are financed with employers contributions and general tax revenues, creating uncertainty regarding the ability of the government to collect resources to finance such liabilities. - It is not clear whether the Argentinian model will develop the financial markets to the extent achieved in the Chilean case. According to MesaLago (forthcoming), however, smaller pension funds can be more helpful in developing financial markets given that emerging markets can absorb small inflows of pension funds more easily. On the other hand, Bustos (1995) suggests that total privatization, accompanied by large inflows of pension funds, could facilitate faster development of the financial markets. - In this paper we have estimated the salary replacement rate of the integrated pension system. For the public reformed scheme the salary replacement rate fluctuates between 72.5% and 84.1%, while for the mixed pension systems it depends, among other factors, on the rate of return of pension funds and the years of contributions. It is clear that the mixed model will offer higher rates for

REFORMS

343

males than for females. This is explained by the gender inequalities generated by the fully funded component in the mixed model. Comparing both systems (the public reformed and the mixed), we conclude that an insured worker with less than 30 years of contributions would be better off under the mixed model. For those with more than 30 years of contributions, it would depend on the rate of return of pension funds. These results imply that affiliates have strong incentives to move to the mixed pension scheme because the fully funded component of that pension alternative does not depend on years of contribution, as under the public reformed scheme. - The relevant variables in the new Argentinian system are defined in nominal terms (i.e. they are not indexed). This structure is consistent with the exchange rate policy and low rate of inflation of the last years. It would be important, however, to simulate the impact of inflation on pension funds, the level of benefits and the financial viability of the system. This factor is particularly important for Latin American economies given that inflationary processes have been recurrent in their economic history. High payroll taxes for social security in Argentina generate both an adverse effect on employment and growth, and strong evasion incentives. - Finally, we consider the “real” coverage and potential solidarity of the new integrated system. These variables depend crucially on whether affiliates have 30 or more years of contributions. Workers who contribute fewer than 30 years would not be entitled to public pension benefits (universal basic, additional and compensatory pensions). Latin American countries and other developing and developed countries should consider the pros and cons of both the integrated and the private fully funded pension systems, as discussed in this paper. Naturally, the prevailing socioeconomic, political and cultural conditions will determine which alternatives are most appropriate. In addition to the well-known Chilean pension model, the Argentinian reform experience offers new attractive insights to countries considering or undergoing social security pension reforms.

NOTES 1. An extensive classification reforms can be found in Mesa-Lag0

of structural (forthcoming).

pension

2. A complete analysis of the Chilean social security reform can be found in Arellano (1985);Marcel and Arenas (1992); CIEDESS (1992); Diamond and ValdCs-Prieto

(1994); SAFF’ (1994, 1996); Baeza and Margozzini (1995); Uthoff (1995) and Mesa-Lag0 and Arenas de Mesa (forthcoming). 3. The RB is calculated using a formula that depends on three variables: (a) years of contributions to the old pension

344

WORLD DEVELOPMENT

system; (b) earnings; and (c) annuity factors. For more details see Arenas de Mesa and Marcel (1993). 4. In 1995, the real rate of return of the pension funds was -2.5%, the lowest since the private system was created. 5. The compensatory benefit (CP) pays a pension equal to 0.85% of average indexed salary of the last 10 years of employment for every year of contribution to the old system with a maximum of 35 years (see Appendix A). 6. There are some exceptions in Chile that can diminish the minimum years of contributions to 17 (Bustamante, 1988). 7. See Arrau (1991) for an analysis of the intergenerational distribution effects originated by different financing policies followed by the government to finance the deficit created by the pension reform in Chile. 8. This entitlement condition is only required for old age pension benefits. 9.

This is for a case that considers

a single worker, 40

years old in 1994; 1% of annual salary increase; and 4% of annual return on pension fund investments. The gap between women and men was obtained assuming that both retire at age 65; however, if a woman retires at age 60 this gap will increase considerably. 10. In 1990-94, 44% of the women insured made contributions to the pension system. Men’s rate was 56% in the same period.

11. The pension values were estimated based on the programmed withdrawal alternative for retirement and using life expectancy tables for Chile. We are assuming that there are no significant differences between Chilean and Argentinian life expectancy tables. 12. In this case women will still have lower replacement rates than men in the mixed model, but higher than they will obtain in the public reformed scheme. 13. The lack of data for the professional funds prevent us from quantifying the magnitude of this sector. The only reference fund related to them is Sierra (1994) who estimates that 1.5 million workers contribute to these funds.

REFERENCES .I. P., Politicas Sociales y Desarrollo. Chile (Santiago: CIEPLAN, 1985). Arellano, J. P., “La seguridad social en Chile en 10s 90,” Coleccidn Estudios CIEPLAN, 27 (December 1989), pp. 63-82. Arenas de Mesa, A. and M. Marcel, “Proyecciones de Gasto Previsional 1992-2038: Un Modelo de Simulation para 10s Bonos de Reconocimiento,” Document0 de Trabejo, Direction de Presupuestos, Ministerio de Hacienda (Santiago: Ministerio de Hacienda, February 1993). Arenas de Mesa, A. and V. Montecinos, “The privatization of social security and women’s welfare: Gender effects of the Chilean reform,” Mimeo (Pittsburgh: University of Pittsburgh, February 1996). Previsional Chilena y su Arrau, P., “La Reforma Financiamiento Durante la Transition,” Coleccidn Estudios CIEPLAN, 32 (June 1991). pp. 5-44. Arrau, P. and K. Schmidt-Hebbel, “Pension Systems and Reforms: Country Experiences and Research Issues.” Rev&a de Andlisis Econdmico, Vol. 9, No. 1 (June 1994), pp. 3-20. Baeza, S. and F. Margozzini, Quince AAos Desput5. Una Mirada al Sistema Privado de Pensiones (Santiago: CEP, 1995). Beattie, R. and W. McGillivray, “Una Estrategia Riesgosa: Reflexiones Acerca de1 Informe de1 Banco Mundial titulado Envejecimiento sin Crisis,” Revista International de Seguridad Social, Vol. 48, No. 3-4 (1995), pp. 7-28. Bour, J. L., M. Cristini, N. Susmel, J. Delgado and M. Panadeiros, “Establishing equity in Argentina,” in F. E. Barreto de Olivera (Ed.), Social Security Sysfems in Latin America (Washington, DC: IDB, 1994). Broda y Asociados, Carta Econdmica, several issues (Buenos Aires, 1995). Arellano,

1924-1984

J., Funcionamiento de1 Nuevo Sistema de (Santiago: ICARE, 1988). Bustos, R., “Reformas a 10s Sistemas de Pensiones, Peligros de 10s Programas Opcionales en America Latina,” in S. Baeza and F. Margozzini (Eds.), Quince Afros DespuPs. Una Mirada al Sistema Privado de Pensiones (Santiago: CEP, 1995). pp. 225-246. Cheyre, H., La Previsidn en Chile. Ayer y Hay (Santiago: CEP, 1988). CIEDESS, 12 Aiios de Modemizacidn de la Seguridad Bustamante,

Pensiones,

Social

en Chile:

Evaluacidn

Critica

Y Proyecciones

(Santiago: Corporation de Investigation Estudios y Desarrollo de la Seguridad Social, 1992). Direccidn de Presupuestos, Estadisticas de las Finanzas Ptiblicas 1987-1995 (Santiago: Ministerio de Hacienda, 1996). Diamond, P., “Privatization and Social Security: Lessons from Chile,” Revista de And&is Econdmico, Vol. 9, No. 1(June 1994), pp. 21-33. Diamond, P., “Social Security Reform in Chile: An Economist’s Perspective,” in P. Diamond, D. C. Lindeman and H. Young (Eds.), Social Securiq: What Role for the Future? (Washington, DC: The Brookings Institution, 1996), pp. 213-224. Diamond, P. and S. ValdCs-Prieto (1994), “Social security reforms,” in B. Bosworth, R. Dombusch and R. Laban (Eds.), The Chilean Economy: Policy Lessons and DC: The Brookings Challenges (Washington, Institution, 1994), pp. 257-328. FIEL, “La Prevision Social en las Provincias Argentinas,” Mimeo (Buenos Aires: FIEL, 1995). Foxley, A., E. Aninat and J. P. Arellano, L.as Desigualdades Econdmicas y la Accidn de1 Estado (Mexico, DF: Fondo de Cultura Economica, 1980).

SOCIAL SECURITY

Gillion, C. and A. Bonilla, “Analysis of a national private pension scheme: The case of Chile,” International Labor Review, Vol. 131, No. 2 (1992), pp. 171-195. INDEC, “Situacibn social en Argentina,” Sintesis No. 3 (Buenos Aires: INDEC, 1995). Isuani, E. A., R. Rofman and .I. A. San Martino, “Las jubilaciones de1 siglo XXI: Podemos gastar a cuenta?” Boleri’n Znformativo Techint, No. 286 (April-June, 1996), pp. 79-104. James, E., “Protecting the old and promoting growth. A defense of averting the old age crisis,” Policy Research Working Paper No. 1570 (Washington, DC: The World Bank, 1996). Marcel, M. and A. Arenas, “Social security reform in Chile,” Occasional Papers No. 5 (Washington, DC: Interamerican Development Bank, 1992). Mesa-Lago, C., Social Security in Latin America: Pressure Groups, Stratification, and Inequality (Pittsburgh: University of Pittsburgh Press, 1978). Mesa-Lago, C., Changing Social Security in Latin America: TowardAlleviating the Social Cost of Economic Rqform (Boulder: Lynne Rienner, 1994). Mesa-Lago, C., “The reform of social security pensions in Latin America: Public, private, mixed and parallel system” in Geburtstag von Herrn Prof. Dr. Hans F. Zacher Mitzuwirker (Ed.), Festschrif sum 70 (1996). Mesa-Lago, C. and A. Arenas de Mesa, “Fifteen years ofprivatization of the Chilean pension system: Evaluation, lessons and challenges,” in Maria A. Cruz-Saco and Carmelo Mesa-Lag0 (Eds.), Reforming Pension and Health Care Systems in Latin America: What Are the Options (forthcoming). Mitchell, 0. and S. P. Zeldes, “Social security privatization: A structure for analysis,” American Economic Review. Vol. 86, No. 2 (1996), pp. 363-367. Munnell, A., “Comment to social security around the world,” in P. Diamond, D. C. Lindeman and H. Young (Edsj, Social Security: What Rolefor the Futurer (Washington, DC: The Brookings Institution, 1996) pp. 197-l 98. Posadas, L., “El Nuevo Sistema de Jubilaciones y Pensiones y el Deficit Previsional Ptiblico,” Estudios, Vol. XVII, No. 68 (January-March, 1994), pp. 41-59. SAFJP, Superintendencia de Administradoras de Fondos de

APPENDIX

A: DEFINED-BENEFITS

AMPO=O.ll Where:

W,

Jubilaciones y Pensiones, Memoria Trimestrul (Buenos Aires: SAFJP, various issues). SAFP, Superintendencia de Administradoras de Fondos de Pensiones, Boleti’n Mensual (Santiago: SAFP, various issues). SAFP, Superintendencia de Administradoras de Fondos de Pensiones, El Sistema Chileno de Pensiones (Santiago: SAFP, various issues). Schuhhess, W. E. “Antecedentes y fundamentos de1 anteproyecto de ley de solidaridad previsional,” Previsidn Social, No. 16 (October-December, 1994), pp. l-13. Schulthess, W. E. and G. Demarco,Argentinat Evolution de1 Sistema National de Prevision Social y Propuesta de Reforma (Santiago: CEPAL/PNUD, 1993). Schulthess, W. E. and G. Demarco, “El financiamiento de1 regimen previsional public0 en Argentina despues de la reforma,” Paper presented at the VII Seminario Regional de Politica Fiscal (Santiago: CEPAL/PNUD, January 22-25,1996). Sierra. B. C., “Algunas consideraciones acerca de la planeada unification de1 sistema previsional,” Previsidn Social, No. 14 (1994) pp. 21-24. SSA, “Social security programs throughout the world,” Research Report #64 (Washington, DC: US Social Security Administration, 1995). Uthoff, A., “Some features on current pension system reform in Latin America,” Revista de Andlisis Econdmico, Vol. 9, No. 1 (June, 1994), pp. 21 l-236. Uthoff, A., “Reformas a 10s sistemas de pensiones en America Latina y el Caribe,” Serie Financiamiento de1 Desarrollo, No. 29 (Santiago: CEPAL/PNUD, 1995). Wagner, G.. “La seguridad social y el programa de pensidn minima garantizada,” Document0 de Trabajo No. 13 (Santiago: Instituto de Economia de la Universidad Catdlica de Chile, December 1990). World Bank, “Argentina: From insolvency to growth,” Country Report (Washington, DC: World Bank, 1993). World Bank, Averting The OldAge Crisis (Washington, DC: Oxford University Press, 1994). Zurita, S., “Minimum pension insurance in the Chilean pension system,” Revista de Andlisis Econo’mico, Vol. 9, No. 1 (June 1994), pp. 105-126.

IN THE ARGENTINIAN

The average compulsory pension contribution (AMPO) is calculated as 11t/Oof the average salary of the pension system contributors. Because the system is mandatory for all workers (salaried and self-employed), the AMP0 can be interpreted as 11% of the average salary of the economy. (1)

345

REFORMS

PENSION

SYSTEM

W, is the monthly average of taxable wages in each semester for salaried workers (Note: the taxable wage is up to 60 AMPOs): 1. Universal Basic Pension: UBP benefit Years of contributions *Less than 30 *30 to 45

Formula 0 UBP = 2.5 AMP0 [l + (yc - 30)/100]

(2)

346

WORLD DEVELOPMENT

Substituting

equation (1) into (2) yields:

Formula 0 AP = 0.015 * yen * W<,‘O

CJBP = 0.275 W, [ 1 + (yc - 30)/l 001

(3)

*30 years or more

UBP=2.5AMPO[1.15]

(4)

Where:

*More than 45

Substituting

Years ofcontributions *Less than 30

equation (1) into (4) yields: Z/BP = 0.31625 W,

(5)

(6)

W,l” is the average salary of the last 10 years of contributions before retirement. yen is the number of years contributed to the new system; 3. Compensatory Pension: CP benefit (same limits as AP)

Where: yc is the number of years contributed new system;

to either the old or the

2. Additional Pension: AP benefit (maximum benefit = 1 AMP0 per year of contribution; maximum years of contributions = 35)

APPENDIX

Years of contributions *No minimum years of contributions required

Formula CP = 0.0085 * yco * W,lO

(7)

Where: yco is the number of years contributed

to the old system.

B: PENSION REFORMS IN CHILE AND ARGENTINA. SUMMARY OF MAIN CHARACTERISTICS

Country (beginning of the new system) A. Transition 1. What happened with the old system?

Chile (1981)

Argentina (1994)

It was “closed” and will gradually disappear

It was maintained with changes

“open” but

2.

At the moment of the reform, were workers allowed to stay in the public systems?

Yes

Yes

3.

Is the fully funded defined-contribution mandatory for new workers?

Yes

No

4.

Can workers go back to the public scheme once they are in the fully funded?

No, however, during 1981-86 it was allowed only for workers of the old system

No, however, during the first two years it was allowed

5.

Is there any acknowledgment for past contributions to the old system?

Yes (recognition

Yes (compensatory

system

B. Profile of the New Pension System 1, Does the system guarantee a minimum income?

pension)

Yes, a public minimum pension Savings from individual capitalization, and general tax revenues

Yes, a public defined-benefit universal basic pension (UBP) Employer’s contributions and general tax revenues

What are the benefits that the system provide?

An annuity, a phased withdraw (programmed pension), or a combination of both

-Financing

Employee’s

Workers can choose between: (i) an annuity or a phased withdraw; or (ii) a public defined-benefit pension (AP) Employee’s contributions

-Financing

2.

bond)

contributions

Continued

SOCIAL SECURITY

APPENDIX Country (beginning

of the new system)

347

REFORMS

B: CONTINUED Chile (1981)

Argentina (1994)

3.

Can workers make voluntary contributions exceeding the legal requirements?

Yes, savings in individual accounts

Yes, savings in individual accounts (only for those who chose the mixed scheme)

4.

Does the system provide a welfare (social assistance) pension

Yes, for those who do not reach entitlement conditions, means-tested General tax revenues

Yes, for those who do not reach entitlement conditions, means-tested General tax revenues

Yes, but it is optional for self-employed workers

Yes, for all workers

19/210/o 13.2%

27% 27%

-

employer: self-employed employee: self-employed

-

Financing

5.

Is affiliation to the system mandatory?

6.

Payroll taxes for pension system -Before the reform - After the reform

1.

Contributions to the public defined benefit schemes -For the UBP -

8.

For the AP

Contribution to the fully funded defined contribution scheme -Available for old-age pension

worker: worker:

16% 16% 11% 11%

9.9 (10% minus fixed commission) 3.0%

7.5% (11% minus fixed and variable commissions) 3.5%

UF (Constant units based on CPI)

AMP0 (average mandatory employee contribution)

10. Maximum taxable income

60 UFs (US$l,841)

60 AMPOs (US$4,320)

11. Sectors not included in the reform

Armed Forces and Police

Armed Forces and Police, Provincial and Municipal Public Employees, Professional Funds

C. Role of the Private and Public Sector 1. Are the Pension Fund Management Companies (AFP/AFJP) regulated by the Government

Yes

Yes

-Disability/Survivor/Administration 9.

“Monetary

costs

currency” of the system

2.

Is a new public institution created to oversee the AFPlAFJPs?

Yes, a Superintendency (SAFP)

Yes, a Superintendency (SAFJP)

3.

Can the public sector participate sector?

No

Yes

4.

Who collects the contributions?

Each Pension Fund Management Companies (decentralized)

The public sector (Centralized)

5.

Can the AFP/AFJP offer other services than old-age, disability and survivor pensions?

Since 1988 the AFP offer to its affiliates individual savings accounts

No

in AFP/AFJP

Sources: Based on Uthoff (1994, 1995); Mesa-Lag0

(1994); World Bank (1994); and authors’ own studies

348

WORLD DEVELOPMENT

APPENDIX

C: ESTIMATION OF PENSION BENEFITS FULLY FUNDED SCHEME

The general formula to estimate pension benefit is given by (8): CA,, B,, = an

(8)

High capital accumulation (CA) implies high level of pension benefits while high annuity factor (an) decreases pension levels. The individual capital accumulation is given at the period n, by the following formula for both sex:

BY GENDER

IN THE

of retirement (period t, 60 for females and 65 for males), R is zero. Choosing n equal to 50 years old is consistent with other microeconomic studies of wages in the life-cycle and pension levels in the new fully funded system in Chile (Cheyre, 1988; Wagner, 1990; Arrau, 1991). Applying these assumptions to equation (10) we get: R. CA,,,, = CA,,. [ n (1 + r,)l + 12 4 1TWt,,,- Cl

f=lI+, R, [ 1 (1 + rJfi”l

(11)

,=I? CA,,, = CA /,,,_, (1 + rJ + 12d, 11 + -1 2 [TW,,, (1 +&-Cl

(9)

where, W, is the monthly wage of the individual i at period 1, g is the annual rate of growth of wages, d is the density of contributions, T is the social security contribution, C is the fixed commission, and r is the real rate of return of the pension funds. The forward solution of equation (9) is:

CA,,= CA,,,) [ ii (1 +I._,)] + 124 I1 + ‘1 2 t=O n [ C CTW,,,(1 + RJ-‘+I - C9(1 + r,)ll

(10)

I=0

where, CA, = 0 (by definition CA, is the capital accumulation at period r=O and it is equal to zero). In equation (lo), we assume that since the working-life is from t=O until r=n, the wages grow at a real annual rate g. If we assume that n is SO years old, then from there until the age

Replacing CA, from equation (10) into equation (1 I), then we get the general formula of capital accumulation at period t=R,.

CA,,R,=12d,[[l+

(1 +

?,[ 2

;. (TW,,,(l+g,)“~‘+‘-C) I=0

r,)rl[ ;r (1 + r,)l + [T w,,,,- cl[ i (1 + r,Y-‘11 *=a+, t=n (12)

In our model we are considering a competitive labor market, therefore the wages, the density of contributions, and the rate of growth of the wages are the same for both sex. In this context, if females postpone their retirement until age 65, the capital accumulation CA, (see equation 10) will be the same for both sex. Another interesting point is that capital accumulation has a positive and direct dependence with the pension fund rate of return as determined in the financial market. Calculations show that an increase of 1% in the rate of return will produce an increase of 25% in the individual capital accumulation over 40 years of contributions (Arellano, 1985).