Pension reform proves perilous in Latin America

14 May 18

Nicaragua’s violent unrest highlights the danger faced by unpopular leaders who tinker with retirement systems, says Gavin OToole.

 

Deadly violence in Nicaragua sparked by abrupt changes to the country’s pension system have underlined the high stakes involved in reforming public finances within Latin America.

International outrage at the deaths of at least 34 people in April’s protests against the pension shake-up that provoked a bloody government crackdown was further fuelled by the murder of a journalist.

The United States, the European Union and the Vatican all waded in to voice their concern, compounding the pressure that forced Nicaragua’s besieged president Daniel Ortega into a humiliating withdrawal of his plans.

On the face of it, the reforms due to take effect in July were not radical.

Pensioners faced a 5% cut in payments, with the funds to be diverted to healthcare, workers’ social security contributions would have gone up from 6.25% to 7%, and employers would have had to put more into the pot.

But the severity of the protests highlight the difficulties pension reform can pose for politicians, especially if their legitimacy is weak.

While Nicaragua’s public sector deficit at a projected 3.3% of GDP in 2018 is considered manageable, there has been rapid deterioration in the finances of its social security system (INSS) – whose deficit rose to $77m in 2017.

The growing shortfall is largely the result of a surge in the number of elderly people receiving “war pensions” since 2007 – when Ortega took power – which critics branded a political move to bolster support for his Sandinista party.

The IMF has been at the forefront of calls for reform, warning that the INSS was on course to run out of cash by 2019.

This might have been less of an issue were it not for growing disillusionment with Ortega, whose rule has taken a distinctly autocratic turn, and allegations that his Sandinistas have dipped into the pension fund casually for their pet projects.

Pension reform has also been something of a running sore in Nicaragua’s relationship with the IMF since at least 2010, when similar proposals presented by Managua to the Fund under its credit commitments were kicked down the road until after subsequent elections.

But when all is said and done, there is little that makes Nicaragua different from other Latin American countries shaken by protests over pension reform in recent years.

In Brazil, President Michel Temer made pension reform the centrepiece of his agenda but has repeatedly stumbled in his bid to achieve it. Last year a pension reform bill provoked violent protests, a later attempt to revive it failed, and in February he shelved the plans.

Brazil has one of the world’s most generous social security systems – spending about 4% of GDP on public sector pensions alone, prompting the World Bank to estimate that without “urgent” reform the pension deficit could reach a staggering 16% of GDP by 2066.


Under the wave of left-of-centre governments that came to power pursuing poverty reduction strategies after 2000, many countries appended non-contributory schemes for the elderly financed from the general budget.


In Argentina, President Mauricio Macri’s pension reforms aimed at lowering the budget deficit were passed by congress in December in the face of angry protests that galvanized his opponents and badly dented his approval ratings.

All eyes are now on Chile – where the conservative president Sebastian Piñera is bracing himself for stiff opposition to his pledge to reform pensions – because of the country’s historical role as a pioneer of pension reform in Latin America.

Chile’s system was privatised after 1981, shifting from a common fund paid for out of taxes to individual accounts funded by defined contributions, sparking a wave of copycat changes across Latin America.

However, defined contributions systems in Latin America have been plagued by problems – highlighted by recurrent protests in Chile where, instead of competition, privatisation created monopolies that paid out paltry sums.

Worst of all, Latin America’s complex labour markets – in which up to 130 million people subsist in the informal economy – have obstructed ambitions to achieve universal pensions coverage.

Fewer than half of all workers are thought to be covered by social insurance, and in Central America coverage rates are just 23%. The Inter-American Development Bank has warned that, without reforms, by 2050 about 83 million Latin Americans could lack a pension.

Distortions in Latin American labour markets have also meant that pensions systems help to perpetuate inequality, disproportionately benefiting the most pampered groups such as Brazil’s civil servants.

In retrospect, governments have repeatedly underestimated the challenges posed by informal labour markets – explaining why there was both something of a reaction against the Chilean pension model after the 1990s and why current debates focus on low coverage.

Under the wave of left-of-centre governments that came to power pursuing poverty reduction strategies after 2000, many countries appended non-contributory schemes for the elderly financed from the general budget.

This had dramatic results: according to the World Bank, Latin America expanded pension access by 11 million previously excluded people aged over 65.

But when economies began to slow as the commodity boom came to an end in 2013, these systems began to be portrayed as budgetary black holes.

What is now bringing this issue to a head is the demographic timebomb ticking beneath Latin America’s shaky pensions infrastructure.

The region is getting old – raising the spectre of a fiscal nightmare as retirees begin to outnumber the number of workers needed to support them through taxes. Life expectancy has risen from 52 years in 1950 to 76 between 2015–20 – and is expected to be about 85 by 2100.

All of which underlines why pension reform is so politically explosive in this region: to succeed, a government must reassure every social sector – and to do that it needs ironclad legitimacy.

This explains why in Brazil the unpopular Temer – who came to power through the impeachment of his predecessor Dilma Rousseff – has found it impossible to plug the pensions sinkhole.

It is why Argentina’s Mauricio Macri incurred a high political cost scraping through limited reforms.

And it is why this seemingly innocuous issue has placed the survival of Ortega in such fatal doubt that he may conclude it is finally time for him to ... take his pension.

  • Gavin O'Toole, expert on Latin America
    Gavin O'Toole

    A freelance journalist. He has written six books about Latin America and taught the politics of the region at Queen Mary, University of London.

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