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Pension Reform Could Be Godsend For Weak Latin Markets By: Charles Roth
NEW YORK -- As Latin America's policy makers watch the value of the region's financial assets slide, they might be inspired to pick up the pace of pension reform. Proponents of private, or at least mixed public-private pension systems, say reforms away from the defined benefits of state-run "pay-as-you-go," or Paygo, programs tend to deepen and extend the breadth of domestic financial markets. As regulators permit privately managed pension funds to increase their exposure to a variety of securities, the added liquidity should eventually attract more investors - foreign and domestic - and boost asset prices. Equally important, notes Anita Schwartz, head of the World Bank's pension research team, is finding a way to deal with the deficits accumulated by regional governments under the Paygo systems. "Getting rid of those deficits over time is as much a boon to economic growth as capital formation," she noted. In a Cato Institute report late last year, Jose Pinera, the architect of Chile's well-regarded private pension system, said the Paygo program has in general turned out "to be the central pillar of the welfare state, on which the possibility of winning elections by buying votes with other peoples' money - even with the money of other generations - led to an inflation of social entitlements, and thus to gigantic unfunded, and hidden, state liabilities." While most Latin American countries are taking steps to reform their pension systems, Chile is clearly at the forefront. "Because (Chile's system) is based on privately managed, individual capitalization accounts with defined contributions, the new system effectively depoliticized the allocation of benefits," Bear Stearns said in a recent report. This has made for a sustainable pension system, and one that's more equitable in the distribution of benefits. It has also helped foster political stability and economic growth, Bear Stearns added. As for enhancing the country's capital market, Chile's stock market capitalization about doubles the regional average in terms of gross domestic product. In August, Chile, which privatized its pension system in 1981, will increase investment limits for pension funds' holdings of corporate bonds and equities, and raise the limit on more risky securities to 3% of assets from 1%. Based mainly on current investment patterns, Bear Stearns estimated that investment in domestic equities could eventually almost double from nearly 10% at the end of 2001. Total pension fund assets amount to some 55% of GDP, proportionally towering over those of other countries in the region. Beginning Oct. 1, the private sector will also start to manage the nation's unemployment insurance system. It will also be based on individual accounts into which both employees and employers contribute, though the government will also guarantee a minimal level of coverage through an annual contribution of $12 million. These accounts will also be invested in a mix of stocks and bonds, subject to regulated exposure levels. Mixed-Systems Produce Mixed Results, Analysts Say
Most Latin American nations have instituted reforms, and continue to do so, with returns on private pension systems ranging between 7% and 11%. But the Cato Institute's Pinera suggested that halfway reforms still offering workers a choice between the Paygo and private pension funds leave the door open "to an unfunded system that politicians may once again abuse." And too few workers participate in the private fund industry, despite the investment returns. For example, stock market research firm Birinyi Associates noted that by June 2000, only some 10% of Peru's working population was contributing to individual retirement accounts. Peru's private pension industry has accumulated about $4 billion in assets - including stocks, bonds and other instruments - equivalent to some 7% of GDP. Legislators are analyzing measures permitting private pension funds to increase their exposure to international securities as a means to diversify holdings amid a dearth of domestic securities. But the central bank apparently wants only a modest increase to limit capital outflows. Like Peru, Colombia also decided to restructure its pension system in the early 1990's. But it, too, has left a near-bankrupt Paygo system in place, allowing workers to jump between the public and private systems. Last week, a senate committee approved a long-awaited bill to reform the Paygo system by raising contributions and the retirement age. But the bill still has to go through plenary votes in both houses. In a 1999 accord with the International Monetary Fund, Colombia became obligated to fix its pension system. And President-elect Alvaro Uribe has made pension reform one his top priorities. Private pension funds - grouping a variety of domestic and very limited foreign securities - have nearly 4.5 million participants, while assets under management total almost $5 billion, equal to just under 6% of GDP. Earlier this month, Mexico's top pension regulator said he expects Senate approval by October on reforms to increase participation and allow overseas investments. Until now, public sector workers haven't had the option of transferring their funds to privately managed individual accounts, which number 26.9 million and contain assets of nearly $30 billion, or close to 5% of nominal GDP. Mexico's private pensions, created in 1997, can't invest in equities, and may only buy national public debt securities and high-grade corporate bonds. But under the proposed reform, which the lower house passed in April, private pension managers would eventually be able to invest up to 20% of their portfolios in foreign debt securities. In Brazil, private pension plans offered by some companies supplement the mandatory Paygo system, which has long run deep deficits. Through a number of reforms to its Paygo system - including raising minimum retirement ages and dramatically reducing benefits for those who retire early - Brazil should close that deficit by 2015, the World Bank's Schwarz said. But, based on current assumptions, it would fall back into deficit five to 10 years later, she added. Brazil's private pension industry can invest in domestic debt and equities, as well as real estate, but not foreign securities. Total assets round 15% of GDP. In neighboring Argentina, the country's private pension system also supplements a state-run Paygo. But the country's financial crisis has engulfed it. Last year, the government removed the 50% cap on private pension funds' holdings of public debt securities and pushed them to invest in more public debt so that it could cover its obligations. By the end of 2001, more than 80% of the funds' assets - which totaled about $21 billion, or 8% of GDP - were public debt instruments. In December, the government imposed capital controls and defaulted on its $141 billion in debt. Shortly thereafter, it converted dollar-denominated assets into the local currency, which has since plummeted in value. Venezuela's bankrupt pension system is also in crisis. Last week, the Andean nation postponed for a fifth time the introduction of a pension reform law. A new mixed pension system was ready for implementation when President Hugo Chavez took over in early 1999, but his party's resistance to private sector pension management has held up the reform. FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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