Pension reform in Europe in the 90's and lessons for Latin America

Reviewing and comparing the economic histories of Europe and Latin America we can observe that the universality of social security systems and the concurrent development of labor market institutions allowed Europe to reduce social inequality, while this has not been possible in Latin America. Pension systems in Latin America face some of the same problems that Europe's social security systems have faced before but with more difficult financing conditions. This document focuses on the lessons that Latin American countries may draw from the experience of Europe as well as on how reforms undertaken by the majority of countries of the region show different paths (to be taken) on how to place social security on an economic sustainable path. The paper is organized as follows: chapter two provides the idea that even though the OECD countries succeeded in transferring growing prosperity to the elderly, but at the same time design and taxes rules were working in the wrong direction to financial sustainability, OECD countries needed to reengineer their pay-as-you-go systems. Chapter three focuses on the fact that Latin American countries have the prerequisites for productivity growth in the coming quarter century, trough growth of human capital and labor force growth. The challenge for the Latin American countries will be to bring the entire population into this growth process, and include them within the institutions of the formal economy, and pension systems that transfer individual resources over the life cycle. In chapter four we discuss about the measures taken by countries in Europe to deal with concerns about financial sustainability and fairness, we suggest some important insights for Latin America, and how adverse demographic change and cost-push effects of generous systems have been the driving forces behind OECD reforms during the 1990's. Chapter five gives a brief description about the National Defined Contribution PAYGO system. Chapter six shows the explanation of what lies behind the path taken in Europe to introduce financial account systems. Financing the transition to financial account systems, the chapter says that in countries where coverage is low the future cost of the guarantee could be substantial, implying an increase in the tax rate on future workers. Where financial account systems have been introduced, younger generations have traded rights in the PAYGO scheme for rights in the financial account scheme. What European countries that have introduced financial account schemes have done is to mix these with PAYGO, diversifying participant risk between economic and financial rates of return. Chapter seven is emphatic to show that one of the strengths of post-war OECD systems has been the poverty reduction impact, and can be attributed to the high coverage level, a special provision for women and added safety net factors. Chapter eight enumerates the differences between the Latin America and European reforms. With goals often been the same, they have been moving away from redistributive Defined Benefit systems toward contribution-related-systems, and the chapter also provides the lessons the region has taken from the European process. Chapter nine summarizes our findings and concludes the paper.