Calculating the redistributive impact of pension systems in LAC
- Pension systems constitute one of the major social programs in LAC and absorb an important part of the budget in many countries.
- On average, LAC's pension systems are designed to provide pensions above what workers would have obtained by investing pension contributions in a safe asset.
- Pension systems are designed to be progressive by offering higher replacement rates (pensions relative to earnings) for low-income workers. Despite this progressivity, in some countries, by design, absolute subsidies could be higher for high-income workers. This occurs because the cost of one percentage point of the replacement increases with the average pension.
- The actual incidence of pension systems is far less progressive than their design implies. Given the levels and patterns of informal work in LAC, a much higher share of high-income workers is eligible for pension benefits. This means that the incidence of built-in subsidies is highly concentrated in the upper part of the income distribution.
- Countries like Chile, with explicit subsidies targeted at the bottom of the income distribution, obtain a more progressive distribution of subsidies.
- Because of relatively low participation rates, women have a weaker link with the pension system and, hence less likely to benefit from implicit subsidies.
- We show that non-contributory pensions, if well-targeted, largely improve the redistributive properties of pension systems in LAC.
- Pension systems can be designed to be more progressive by reducing or eliminating the minimum number of years required to access benefits, increasing the link between contributions and benefits, and making subsidies explicit and targeted towards the lower part of the income distribution.
