Calculating the redistributive impact of pension systems in Latin America and the Caribbean

Abstract

This paper analyzes implicit subsidies in pension systems across Latin America and the Caribbean. First, we find that pension systems are designed to be progressive by granting a higher replacement rate to low-income workers than high-income workers. However, because all systems subsidize pensions beyond what an actuarially fair system would produce, the absolute subsidies are larger for high-income individuals. Second, using data from Colombia, Chile, El Salvador, Paraguay and Uruguay, we show that, in practice, pension systems tend to be regressive rather than progressive. This is because low-income workers, who contribute intermittently, typically receive no pension as they fail to meet the minimum contribution levels. In some defined benefit systems, 70–95% of subsidies are concentrated in the top three labor income deciles. In defined contribution systems, subsidies are less regressive, but 50–60% still concentrate on high-income deciles. Lastly, non-contributory pensions partially offset the regressivity of pension systems.

Pensions, Subsidies, Taxes, Latin America

Introduction

The Latin America and the Caribbean (LAC) region is still relatively young. On average, 9% of the population is sixty-five and above compared to high-income countries in Europe (19.1%) or North America (16.8%). However, population aging is happening faster in LAC than anywhere else in the world. It took Europe 56 years for the share of the population older than sixty-five to grow from 10% to 20%. In LAC this transition will happen in half that time (UNPD, 2019). This will increase pension expenditures in LAC from 3.9% of GDP in 2020 to 7.4% in 2050 (Aranco et al., 2022). By 2050, without reforms, as the LAC population ages, pensions are bound to absorb an important share of public spending, leaving little room for investment in other social priorities (Izquierdo et al., 2018).

Despite being one of the main components of public expenditure in LAC, there is relatively little systematic measurement of how pension spending distributes resources within generations across different income and population groups and across generations. Measuring the distributive properties of pension systems is challenging. Pension systems differ from other taxes levied on households as participants perceive contributions as giving them a claim to future benefits. Generally, the link between pension contributions and future pension rights depends on how closely benefits are related to contribution histories, ‘actuarial fairness’, and the implicit returns on pension contributions relative to an outside investment option in a safe asset. In simple terms, an actuarially fair program would match expected individual entitlements exactly to lifetime contributions.

This paper measures the within-generation tax component and redistribution in LAC. That is, how the pension system treats workers with different characteristics (income, history of contribution, gender, etc.), that belong to the same cohort.¹ We present two exercises. First, we build on work from Altamirano et al. (2018) and update the theoretical distributional properties of pension systems in 26 LAC countries. We do this by calculating the difference between individual entitlements and lifetime contributions for hypothetical workers with full-contribution careers. It is helpful to think of this exercise as what pension systems are designed to do for fully compliant workers. Second, to understand the actual incidence of pension systems in LAC, we use data from social protection surveys and estimate the replacement rates (pensions relative to earnings) and implicit subsidies in five pension systems in LAC (Colombia, Chile, El Salvador, Paraguay and Uruguay) for the generation retiring between approximately 2030 and 2040.

The main results of this paper are as follows. First, on average, most of LAC’s pension systems are designed to provide pensions to workers above what they would have obtained by investing pension contributions in a safe asset. However, there are large differences across countries and types of systems. In defined benefit programs (define contribution programs), a worker that contributes his entire life from age 20 to the minimum age of retirement receives an average replacement rate of 63% (37%), 30 pp (9 pp) higher than an actuarially fair pension. Second, pension systems are designed to be progressive by offering higher replacement rates for low-income individuals. In defined benefit programs, workers earning 75% of the average wage obtain a replacement rate 17 pp higher than workers earning 3 average wages. Despite this progressivity, absolute subsidies could be higher for high-income workers in defined benefit systems. This occurs because subsidizing 1 pp of the replacement rate is substantially more costly for high-income workers. Third, the actual incidence of pension systems is far less progressive than its design implies. Given the levels and the 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. For instance, in defined benefit systems such as Paraguay and Colombia, the three highest income deciles concentrate between 70–95% of all subsidies. In defined contribution systems, subsidies are less regressive, but still, because low-income workers do not qualify for minimum pensions, between 50–60% of subsidies concentrate in the high-income deciles. Countries like Chile, with explicit subsidies targeted at the bottom of the income distribution, obtain a more progressive allocation of subsidies. Because working women have a weaker link with the pension system, they are also less likely to benefit from implicit subsidies. Finally, if well-targeted, we show that non-contributory pensions largely improve the redistributive properties of pension systems in LAC.

This paper follows the literature that assesses the impacts of pension programs on redistribution. Early literature in the USA quantified the redistribution of the social security program by calculating the net present value of the expected lifetime flows of contributions for different population groups (Coile and Gruber, 2001; Liebman, 2002; Gruber and Wise, 2004; Brown et al., 2009).² One key message from this literature is that the range of transfers received at a given level of average lifetime income is quite wide and depends on variation in mortality rates, variation in earnings levels by secondary earners, and marital status differences, among other factors. Liebman (2002) argues that the income-based redistribution in the current Social Security system is modest compared to the total benefits. Brown et al. (2009) find that as they expand the definition of income to use more comprehensive measures of well-being, Social Security in the USA becomes less progressive.

More recently, there has been increasing awareness of the redistribution of pension systems in advanced countries because of differences in mortality by socioeconomic status. (Chetty et al., 2016). The widening longevity gap between the top and bottom income quintiles in the USA raised the present value of lifetime government benefits for the top quintile relative to the bottom by $132 000 for men and by $157 000 for women (Sanchez-Romero et al., 2020). For Spain, Díaz-Saavedra (2022) documents that the disparity in life expectancy across educational groups is substantial and likely to increase. This disparity may result in an implicit tax or subsidy on the ratio of lifetime benefits to payroll taxes, estimated at 10%, which undermines the redistributive goals of pension systems. The author observes that increasing the minimum pension or modifying the pension benefit formula can effectively restore the long-term progressivity of these systems. Alvarez et al. (2021) report similar findings and recommendations for Denmark.

In LAC, the literature is less extensive, but a few studies try to document the redistribution patterns of pension systems. Forteza (2011) estimates the redistributive impacts of five pension systems: Argentina, Brazil, Chile, Mexico and Uruguay. The authors calculate redistribution by comparing the expected pre- and post-social security lifetime income distribution. They find varying degrees of redistribution, with defined benefit and mixed programs redistributing more than individual savings accounts programs. They also find that the Chilean individual savings account program and the solidarity pillar contribute more to reducing inequality in this group of countries. Similarly, Grushka (2019) proposed a simplified way to think about redistribution by computing the difference in replacement rates by education levels (as a proxy of lifetime income). They find that in Argentina, replacement rates of high school graduates are 10 points higher than college graduates, indicating the system’s progressivity.

The paper makes four contributions to this literature. First, we suggest an approach to compare the intended and actual redistribution of pension systems. Second, using detailed survey data that encompasses the pension contribution histories of workers, we estimate this for five countries in LAC, revealing a significant disparity between the intended and actual redistribution. This discrepancy arises primarily because low-earning workers, who often contribute sporadically, typically do not receive pensions as they fail to meet the minimum contribution requirements. Third, we identify considerable variability across countries, with these issues being more pronounced in countries with generous defined benefit systems with limited coverage, highlighting that both labor market outcomes and pension design are essential to understanding the redistribution of pension systems. Finally, we show that non-contributory pensions partially mitigate the regressivity of the systems. However, given their current scope, these pensions are insufficient to render the pension systems progressive in all countries.

The paper is organized as follows. Section II describes pension systems in LAC. Section III defines the main indicators and methodology used in the paper. Section IV presents theoretical benefits for hypothetical workers in 26 countries in LAC. Section V shows the incidence of pension systems in five LAC countries. Section VI provides a brief discussion and concludes.

A brief description of pension systems in LAC

The main mandatory contributory pension systems in LAC can be classified into three categories depending on how they provide pension benefits. Countries with traditional publicly funded defined benefit systems, countries with individual accounts defined contribution systems and countries that use mixed systems.³

In defined benefit systems, the pension is determined by a formula that usually includes the retirement age; the contributions made to the system (in number of years or weeks), the average salary from which the pension is calculated (generally the last few years worked); and the minimum number of contributions to be eligible for a pension. In many of these systems, individuals who contributed less than the minimum number of contributions receive nothing from the system. In rare cases, like in Colombia, they receive their contributions back adjusted for inflation.

In defined contribution systems, the pension is determined by the accumulated amount of the worker’s contributions plus the returns on these contributions, which is transformed into a pension in the form of a life annuity at the moment of retirement.⁴ The accumulated amount depends on contribution rates, interest rates, and the worker’s years of contribution. The age of retirement, demography, and the technical interest rate of annuities impact the level of the annuity. In some defined contribution systems, minimum pensions are established, regardless of the accumulated amount, if the worker has reached a minimum number of contributions (similar to the eligibility criteria of defined benefit systems). These minimum pensions are what give these systems redistributive qualities.

In some countries, there is a single contributory system (defined benefit or defined contribution) for most workers. In other countries, the total amount of the individual’s pension depends on a combination of these types of systems. For example, in Costa Rica, Panama, or Uruguay, one part of the pension is determined under a defined benefit system, and another, by a defined contribution system (mixed systems). In addition, non-contributory pillars have been implemented in 24 of the region’s countries. Some countries, such as Bolivia or Chile, combine defined contribution systems with non-contributory pensions.

Table 1

Main pension programs in LAC, and key parameters

Country	Type of system	Minimum retirement age		Contribution rates*	Years required to qualify for a pension
		Men	Women	%	Years
Antigua & Barbuda	Defined Benefit	62	62	14.5%	12
Argentina	Defined Benefit	65	60	23.4%	30
Barbados	Defined Benefit	67	67	13.5%	10
Bahamas	Defined Benefit	65	65	9.8%	10
Belize	Defined Benefit	65	65	10%	10
Bolivia	Defined Contribution	55	50	10.0%	10, 15 (MP)
Brazil	Defined Benefit	65	62	28–34%	20 (M), 15 (W)
Chile	Defined Contribution	65	60	10.0%	-
Colombia	Defined Benefit	62	57	16.0%	26
Colombia	Defined Contribution	62	57	11.5%	23 (MP)
Costa Rica	DB + DC	65	65	15.4%	15 (DB), 15 (MP)
Ecuador	Defined Benefit	60	60	11%	30
El Salvador	Defined Benefit	60	55	16%	25
El Salvador	Defined Contribution	60	55	16%	25 (MP)
Guatemala	Defined Benefit	60	60	5.5%	20
Guyana	Defined Benefit	60	60	14%	15
Haiti	Defined Benefit	55	55	12%	20
Honduras	Defined Benefit	65	60	3.5%	15
Jamaica	Defined Benefit	65	65	6%	10
Mexico	Defined Benefit	65	65	6.5%	10
Mexico	Defined Contribution	65	65	6.5%	15 (MP)
Nicaragua	Defined Benefit	60	60	17.3%	15
Panama	DB + DC	62	57	13.5%	20 (DB), 15(MP)
Paraguay	Defined Benefit	60	60	24.5%	25
Peru	Defined Benefit	65	65	13%	20
Peru	Defined Contribution	65	65	10%	20 (MP)
Suriname	Defined Benefit	60	60	10%	10
Trinidad & Tobago	Defined Benefit	60	60	13.2%	15
Uruguay	DB + DC	60	60	22.5%	30
Venezuela	Defined Benefit	60	55	15%	15

Source: Prepared by the authors. Notes: DB = Defined Benefit; DC = Defined Contribution. ^*In defined contribution systems, it corresponds to the rate of capitalized contributions. ^**(M) denotes Men and (W) Women, (MP) Minimum Pension. Most DC systems do not require a minimum of years of contributions to grant pension benefits.

Table 1 summarizes the pension systems in LAC and key parameters such as contributory rates, minimum retirement ages for men and women, and the minimum required number of years to qualify for a pension or a minimum pension.

Understanding the within-generation redistributive elements built into pension systems

To understand the distributional properties of pension systems, we follow Altamirano et al. (2018) and define two indicators. First, the replacement rate is defined as the ratio of pension benefits with respect to the last salary (Equation 1). This indicator captures how the pension benefit compares to the worker’s earnings; it represents the system’s capacity to smooth consumption.

$$ \begin{equation} RR\left({P}_t\right)=\frac{P_R}{S_{R-1}} \end{equation} $$

(1)

Where |${P}_R$| is the pension at the time of retirement and |${S}_{R-1}$| is the worker’s final wage in the period immediately before retiring.

Second, we define subsidies/taxes as pension benefits above (below) that would have been obtained relative to investing the mandatory contribution in a safe asset and obtaining a fair annuity. We exploit this difference between the actual and the actuarially fair estimates to infer the redistribution within pension systems.

Several assumptions are needed to establish the actual and the counterfactual benefit (see Appendix I for details). One key parameter is the interest rate of this safe asset as it establishes the level of subsidies. As a benchmark scenario, we follow the OECD/IDB/WB and establish the safe asset return for LAC at 3.5% real (OECD/IDB/WB, 2014). The order of magnitude of this interest rate is based on several data points. For instance, the Social Security Administration in the US calculates the internal rate of return of the Social Security system between 2.28% and 4.28%, depending on the gender and the marital status of the beneficiary (SSA, 2022).⁵ Similarly, the average rate of return for private pension savings in LAC between 2012 and 2022 was 4.07% (FIAP, 2023).

We can express these subsidies/taxes in two ways. First, the share of the pension (or replacement rate) that is subsidized; i.e. the difference in percentage points between the replacement rate obtained and one resulting from a pure savings system investing in a safe asset. (Equation 2).

$$ \begin{equation} {S}_{RR}= RR\left({P}_R\right)- RR\left[{P}_R^J\left({r}_E\right)\right] \end{equation} $$

(2)

Where |${S}_{RR}$| is the subsidized replacement rate, |$RR\left({P}_R\right)$| is the replacement rate granted by the system, and |$RR\left[{P}_R^J\right]$| is the replacement rate that would result from capitalizing the contributions made to the system at an equilibrium interest rate, |${r}_E$|⁠.

Similarly, these subsidies/taxes can also be expressed as the difference in PPP US$ between the capital necessary to finance the actual pension that workers obtain in a particular system and the capital that would have accumulated if the contributions had been capitalized in a safe asset (Equation 3).

$$ \begin{equation} {\mathrm{S}}_{\mathrm{US}}=\mathrm{K}\left[{\mathrm{P}}_{\mathrm{R}}^{\mathrm{J}}={\mathrm{P}}_{\mathrm{R}}\right]-\sum_{t=0-\left(R-20\right)}^{t=-1}\frac{C_t}{{\left(1+{r}_E\right)}^t} \end{equation} $$

(3)

Where |${S}_{US}$| is the amount subsidized to the individual through the pension system, |$K$| is the capital necessary to purchase a life annuity equivalent to the pension that the system grants upon retirement and |$\sum_{t=0-\left(R-20\right)}^{t=-1}\frac{C_t}{{\left(1+{r}_E\right)}^t}$| is the capital that would result from capitalizing the contributions |${C}_t$| at an equilibrium interest rate |${r}_E$| upon retirement.

The progressivity of pension systems can be understood as providing higher replacement rates to lower-income workers (see Grushka, 2019). For a given interest rate and contribution history, this implies that a larger proportion of the pension is subsidized for low-income workers (Equation 2). However, even when replacement rates decrease with income, the total amount subsidized may not. The total amount subsidized is an important metric for at least two reasons. The fiscal costs of subsidies in GDP terms depend on the total amount subsidized, not on the share of the pension that is subsidized. For example, a pension system that subsidizes 10 percentage points of the pension (according to Equation 2) for all workers regardless of their income, would be spending substantially more on high-income workers because they have a higher salary. Second, countries that grant explicit subsidies through the pension system do so in absolute (total amount) and not relative terms (in relation to the worker’s salary). This is the case of defined contribution systems that establish subsidies as the gap between the accumulated savings at the capital necessary to finance a minimum pension, as well as in countries like Chile and Sweden, where the state complements workers’ savings with a subsidy using a formula that links the total amount of the subsidy with the total amount saved or contributed. Therefore, throughout the paper we put particular attention to the overall level of subsidies by income level.

Explicit and implicit redistribution in pension systems

Most pension systems include explicit redistributive features that aim to provide higher pensions (as a percentage of earnings) to lower-wage workers. Furthermore, pension systems will generate some implicit redistribution as deviations from actuarially fair benefits, depending on various factors, including differential contribution histories, gender, or longevity for different types of workers. These are implicit redistribution elements.

Explicit redistribution

Pension systems tend to have progressive elements in their design: the higher the income, the lower the replacement rates. There are three key features that are designed to contribute to that progressivity. First, the existence of minimum pensions ensures a minimum level of benefit for low-income workers. This is true for both defined benefit and defined contribution programs. For the latter, this tends to be the only redistributive feature. Second, defined benefit formulas tend to decrease with the level of income, providing higher replacement rates to low-income workers. And third, in some systems a maximum pension caps the benefit of high-income workers.

Given the lack of coverage of pension systems, non-contributory pension programs have proliferated in the region (Bosch et al., 2013; Rofman et al., 2013). These pensions extend payments to people who have not made contributions or do not fulfill the requirements for a contribution-based retirement pension. Currently, non-contributory pensions represent a third of the pension coverage in the region. In several countries, there are more people who receive non-contributory pensions than a contribution-based retirement pension. Non-contributory pensions represent a direct explicit subsidy for individuals with sporadic or no contributions.

Implicit redistribution

Redistribution across income levels might happen for other factors even without explicit redistributed components. One of the most important redistributive features of pension systems is the requirement of a minimum number of contribution years to grant pension eligibility in defined benefit systems or a minimum pension in defined contribution systems (see Table 1). This design element has clear implications for the relationship between contributions and benefits.

Figure 1 illustrates this relationship. The dotted line represents the relationship between the number of contributions as a percentage of working life (also known as ‘contribution density’) and the pension obtained in a situation where contributions are made into an individual account, are capitalized with an interest rate r, and from which, upon retirement, the subject obtains a fair annuity in accordance with the mortality tables at the time of retirement in the person’s country. We call this scenario a ‘pure savings scenario’. This represents a pension contract in which the state does not intervene and, therefore, does not offer any subsidy or tax. The individual’s pension in this social contract is derived exclusively from his contributions, from their returns in the financial market, and demographic trends. It, therefore, serves as a reference for comparisons with other pension contracts.

Figure 1

Relationship between density of contributions and benefits. Source: Authors’ elaboration. Note: DB = defined benefit, DC = defined contribution, NCP = non-contributory pension, r* = rate of return of the financial market. Contribution density represents the relationship between the number of contributions as a percentage of an individual’s working life. The pension level depicts a theoretical pension income distribution in arbitrary local currency units. Minimum pension requirements are established arbitrarily at 55% of contribution density in DB systems and 35% in DC systems for illustration purposes. In DC systems, even if workers do not qualify for the minimum pension, they have access to all their accumulated funds, and hence, there are no subsidies or taxes. It acts as a regular private plan

Defined contribution systems closely resemble this scenario. The pension depends on the individual’s contributions to an individual account. However, most individual capitalization systems include a minimum pension that guarantees a level of benefit once a certain number of contributions has been reached (in Fig. 1 this is arbitrarily shown after a 35% contribution density). This minimum pension is represented by a horizontal line at the value of the replacement rate, consistent with this guaranteed minimum pension in Fig. 1 (capitalization with a minimum pension). In DC systems, even if workers do not qualify for the minimum pension, they have access to all their accumulated funds, and hence, there are no subsidies or taxes. It acts as a regular private savings plan.

In defined benefit systems, conversely, there is a very different relationship between contribution and pension level since most do not offer any pension benefit beneath a minimum number of contributions. Once a certain level of contributions has been reached, a pension is granted based on a formula. A pension is not granted if the worker does not reach the threshold. This implies that workers who are not eligible but made contributions receive a negative subsidy (tax) through the pension system.

Finally, non-contributory pensions are represented as a point on the vertical axis since, in principle, there are no contributions for these, and, therefore, no relationship exists between benefits and contributions.

Other elements can generate implicit redistribution in defined benefit systems. For instance, replacement rates are calculated based on the last 5 or 10 years of contributions, which benefits workers with steeper wage profiles and tend to be high-income workers. Similarly, there could be differential longevity for different income levels, which has attracted much attention in the US and European countries. Because of the lack of available data, we do not consider these elements in the analysis below, but they should be part of a future research agenda.

Potential differences between men and women

Depending on the type of system (defined benefit versus defined contribution) and the relative position of women in the income distribution, these differences will manifest as factors that increase or decrease the replacement rates. We highlight three factors that are important in understanding these differences.

First, women have lower wages. On average in the region, formally employed men have salaries that are 14.5% higher than those of formally employed women (Social Security Information System [SIMS], 2022). Although in every system, this produces lower pensions for women, as seen in the previous section, for a given contribution density, in general, lower wages imply higher replacement rates. This occurs because, in practice, there are minimum pensions in both the defined benefit and the defined contribution systems. In addition, in defined benefit systems, the benefit formula tends to be progressive even in the upper part of the income distribution, granting higher pensions to lower-income participants.

Second, women tend to be less attached to the labor market. The previous sections already documented how lower density rates dramatically affect pension levels, sometimes leaving individuals who do not reach the minimum years of pension without any benefits. Women may suffer disproportionately from the consequences of this pension design.

Finally, in some countries, women have a lower minimum retirement age. This has two implications for this exercise. On the one hand, women contribute for fewer years. This reduces women’s replacement rates compared to men’s in all systems. On the other hand, women will have a more extended retirement period. As shown below, this has important implications for defined contribution systems as, assuming gender specific mortality tables, this will yield lower pensions for women for the same number of contributions. Although it does not affect pensions in defined benefit systems, it will impact the calculation of subsidies and taxes.

Figure 2

Average replacement rates of pension systems in LAC (contribution density of 100%). Source: Updated from Altamirano et al. (2018) with circa 2022 parameters and data. Notes: DB = defined benefit; DC = defined contribution. The DC component of the mixed systems is excluded from the average of the defined contribution systems. ISO standard 3166–1 alpha-3 nomenclature was used to denominate countries. The chart presents the baseline scenario as a percentage of the final wage: Simple average between married men and women

Theoretical results for pension systems

We begin by analyzing the benefits and subsidies the pension systems are designed to grant to a hypothetical worker. This hypothetical worker corresponds to a married man or woman who contributes continuously from twenty until the minimum retirement age in each country’s pension system with a final salary equivalent to the average wage in the formal sector (see Appendix I). Although the calculations are made separately for married men and women, the results below reflect country averages.

Figure 2 shows the main result of this exercise. The average replacement rate in defined benefit systems in LAC is 63%. The average worker in the baseline scenario goes from a labor income of 100 to a pension income of 63 at retirement. However, there is considerable variation among the promises countries make in their defined benefit systems. There is a group of countries that offer a replacement rate of more than 80% (Argentina, Ecuador, Paraguay, and Mexico). The majority offer replacement rates of between 50% and 80% (Trinidad and Tobago, Bahamas, Barbados, Brazil, Guatemala, Belize, Guyana, Honduras, Suriname, Colombia, El Salvador, and the defined benefit components of the mixed systems of Panama, Costa Rica, and Uruguay). Some countries offer less than 50% (Venezuela, Haiti, Jamaica, Antigua and Barbuda, and Peru).

There are three countries with mixed systems in the region (Panama, Costa Rica, and Uruguay), which combine defined benefit and defined contribution components. The average replacement rate in these systems is 80%, with Panama offering a joint replacement rate of close to 90%. In mixed systems, most of the pension is determined by the defined benefit component (77% in Panama, 75% in Costa Rica, and 49% in Uruguay).

The average replacement rate in defined contribution systems in LAC is 40% (Fig. 2). The average worker in the baseline scenario goes from a labor income of 100 to a pension income of 40 when he or she retires. Variability is lower than in defined benefit schemes but equally remarkable: from 24% in Bolivia to 51% in Mexico.

Implicit subsidies of pension systems in LAC

Section II defines pension benefits above (below) what would have been obtained relative to investing the mandatory contribution in a safe asset and receiving a fair annuity. As discussed above we establish the safe asset return at 3.5% real. At this interest rate most pension systems today offer benefits that subsidize workers who continuously participate in them. That is, the contributions of the average worker would not be able to finance the entire pension granted by the pension system. The definition of the outside option is crucial to establish the level of subsidies, but relatively variations of the key parameters do not alter the main results in this section. ⁶ This subsidy can be expressed in two ways.

Figure 3 shows the subsidy expressed as percentage points subsidized in the replacement rate. The average worker in the region in defined benefit (defined contribution) systems receives a subsidy of 28 (11) percentage points in his or her replacement rate. That is, given the level of contributions, an actuarially fair pension in the region would be 35% of the final formal wage. Instead, the average worker receives 63%. This implicit subsidy in defined benefit systems equals 46% of his/her total pension. The defined benefit systems that provide the greatest subsidies are Mexico (88 pp), Ecuador (73 pp), Guatemala (53 pp) and Honduras (49 pp).

Figure 3

Implicit subsidies/taxes of pension systems in LAC in percentage points of the replacement rate (contribution density of 100%). Source: Updated from Altamirano et al. (2018) with circa 2022 parameters and data. Note: DB = defined benefit; DC = defined contribution. For mixed countries, the implicit subsidy for DB does not include its DC component, which, in the absence of a minimum pension, equals 0% (the two components of mixed systems are presented separately). ISO standard 3166–1 alpha-3 nomenclature was used to denominate countries. The figure presents the baseline scenario for the average between married men and women

Alternatively, the subsidy can be expressed in monetary terms. This captures the difference in monetary value, adjusted for purchasing power parity, between the capital needed to finance the pension promised by the defined benefit rule and the capital the individual would have accumulated in the safe asset. The average subsidy in defined benefit systems in the region is close to US$ 101 000 upon retirement (Fig. 4). The countries with the highest subsidies are Mexico (in the old DB system), Panama (DB), and Ecuador, with subsidies of US$ PPP 336000, US$ PPP 358000 and US$ PPP 415000, respectively. The countries that least subsidize their contributors are Brazil, Uruguay (BD), Peru (BD) and Venezuela, with negative subsidies, which corresponds to a ‘tax’ through the pension system.

Figure 4

Implicit subsidies/taxes of pension systems in LAC (contribution density of 100%). Source: Updated from Altamirano et al. (2018) with circa 2022 parameters and data. Note: DB = defined benefit; DC = defined contribution. For mixed countries, the implicit subsidy for DB does not include its DC component, which, in the absence of a minimum pension, equals US$ 0 (the two components of mixed systems are presented separately). ISO standard 3166–1 alpha-3 nomenclature was used to denominate countries. The figure presents the baseline scenario, in thousands of US$ PPP of 2022: Simple average between married men and women

Note that there are also important subsidies in defined contribution systems. These subsidies are explicit and arise because of the existence of minimum pensions. Minimum pension guarantee funds finance the excess pension. These subsidies represent US$ PPP 89000 in Colombia, US$ PPP 76000 in the Dominican Republic, US$ PPP 67000 in El Salvador, US$ PPP 59000 in Mexico, and US$ PPP 35000 in Bolivia. A particular case is that of Chile, which has an explicit supplementary pension subsidy that decreases with the level of individual savings. In this case, the subsidy for the average worker is equivalent to US$ PPP 75000.

The replacement rates and monetary subsidies vary sustainably by income level (Table 2). On average, low-income workers exhibit relatively higher replacement rates (conditional on qualifying for pension benefits). Assuming a full contribution density, the average replacement rate in defined benefit systems for workers who earn 75% of the average wage is 69%, and 51% for workers who earn 3 average wages. Similarly, in defined contribution systems in LAC, the replacement rate falls from 51% to 24% (Table 2). An important point is that, despite these progressive elements, monetary subsidies may increase with income in defined benefit systems. This occurs because the monetary subsidy necessary to finance a percentage point of the replacement rate is higher for high-income workers. On average, workers who earn 75% of the average wage in DB systems receive an equivalent subsidy of US$ PPP 94000 compared to US$ PPP 223000 that receive workers who earn 3 average wages. In DC systems, low-wage workers receive a subsidy of US$ PPP 51000 due to the minimum pension, while workers with 3 times the average wage receive a subsidy of US$ PPP 1500.

Table 2

Theoretical replacement rates and implicit monetary subsidies by income level and gender (regional averages)

Replacement rates (% of final pay)	Times the average formal wage
Defined Benefit systems	0.75	1	1.5	2	3
Men	68%	63%	59%	56%	50%
Women	69%	64%	59%	56%	51%
Total	69%	63%	59%	56%	51%
Defined Contribution systems	0.75	1	1.5	2	3
Men	50%	39%	29%	26%	25%
Women	52%	41%	30%	24%	22%
Total	51%	40%	29%	25%	24%
Monetary Subsidies (2022 US$ PPP)	Times the average formal wage
Defined Benefit systems	0.75	1	1.5	2	3
Men	89 308	103 051	136 732	164 471	203 407
Women	98 875	116 186	153 601	191 375	242 834
Total	94 091	109 618	145 167	177 923	223 120
Defined Contribution systems	0.75	1	1.5	2	3
Men	45 907	33 673	14 097	2332	0
Women	56 356	46 456	26 657	11 495	3011
Total	51 132	40 065	20 377	6863	1506

Source: Authors calculations based on Altamirano et al., 2018, with data and parameters updated to 2022. These baseline estimates correspond to simple country averages for married men and women who contribute continuously to social security from age 20 until the minimum retirement age mandated by the respective legislation. See Appendix I for further definition of exogenous parameters and assumptions.

The variation across countries is large (see Appendix II for country results). In most systems, replacement rates fall with income.⁷ However, in some countries replacements rates decline much faster than in other. For example, in Brazil, the Dominican Republic and Peru, replacement rates for workers who earn 75% of the average wage is 40 pp. higher than for workers who earn 3 average wages. But in countries like Colombia (DB), Ecuador or Panama (BD), this difference is below 5 pp. In all, we observe that in countries where the replacement rates remain constant across income levels or experience only a gradual decline, there tends to be a greater provision of monetary subsidies for high-income workers. This phenomenon is present in 12 of the countries in our sample and drives the average results presented in Table 2.

Estimating the incidence of pension systems in five Latin American countries

Most workers in LAC deviate from the stylized worker presented in the previous section. Only 42% of workers, on average, contribute to pensions (Fig. 5). There is a strong correlation between the level of education and the share of workers that contribute to pensions. Highly educated workers are between 20 and 50 pp points more likely to contribute to pensions (Fig. 6). In some countries, the share of low-educated workers contributing to the system is below 10%. Therefore, the incidence of subsidies and taxes associated with the pension system will differ across individuals with different levels of education and income.

Figure 5

Formal jobs across countries, circa 2019. Source: Labor markets and SIMS. Note: Formality rates are calculated as the percentage of employed workers who contribute to the old-age social security national schemes

Figure 6

Differences in formality rates across income levels and occupation, circa 2019. Source: Labor markets and SIMS. Note: Formality rates are calculated as the percentage of employed workers who contribute to the old-age social security national schemes. Schooling levels are estimated using a continuous years of schooling variable harmonized across countries

We use the social protection surveys (SPS) of Chile, Colombia, El Salvador, Paraguay and Uruguay to estimate the implicit subsidies and taxes of the pension system for the generation retiring approximately between 2030 and 2040. SPS were conducted in Chile in 2006, 2009, 2015, and 2022, Colombia in 2012, El Salvador in 2014, Uruguay in 2012 and Paraguay in 2015.

The SPS includes useful information to estimate the effects of pension benefits and pre-retirement labor supply. The SPS contains data about labor force participation, employment in the formal and informal sectors, savings, and demographic information of households. Along with the demographic and labor market status variables, it contains information on accumulated savings in pension funds and labor market history. These retrospective questions about past pension contributions make SPS better suited for this exercise than traditional household surveys. Table 3 shows the main descriptive statistics of the dataset for men and women separately.

Table 3

Descriptive Statistics

Countries		Average labor participation rate	Average formality rate	Average years of schooling	Average wages (2014 PPP dollars)	Average contribution density
All workers aged 25 to 50
Chile		77.0%	69.8%	11.1	820	62.2%
Colombia		86.6%	40.0%	8.9	656	25.4%
Paraguay		77.0%	19.3%	10.2	867	16.7%
El Salvador		69.3%	31.3%	8.1	495	28.3%
Uruguay		82.2%	74.5%	10.6	778	84.0%
All workers aged 40 to 50
Chile	Men	95.0%	70.6%	10.2	854	68.7%
	Women	61.4%	65.5%	10.9	669	49.1%
	Total	77.4%	67.9%	10.5	783	61.1%
	I quintile	79.7%	50.3%	8.1	318	44.2%
	V quintile	87.6%	82.9%	12.9	1567	72.8%
Colombia	Men	95.1%	40.0%	8.5	705	25.7%
	Women	73.4%	37.7%	9.5	528	21.1%
	Total	88.2%	39.4%	8.7	658	24.5%
	I quintile	52.6%	31.9%	9.7	65	26.4%
	V quintile	96.2%	59.0%	12.0	1213	38.1%
Paraguay	Men	96.3%	18.5%	9.2	988	47.5%
	Women	60.1%	20.9%	9.6	810	43.5%
	Total	77.8%	19.4%	9.3	920	19.2%
	I quintile	47.8%	0.0%	5.4	215	15.8%
	V quintile	95.3%	31.9%	12.2	1353	52.5%
El Salvador	Men	92.5%	33.5%	7.8	578	30.3%
	Women	59.7%	27.4%	8.0	481	24.8%
	Total	72.7%	30.5%	7.9	530	27.6%
	I quintile	69.6%	0.0%	4.3	153	6.8%
	V quintile	86.3%	52.9%	11.4	911	45.9%
Uruguay	Men	93.9%	78.0%	9.8	978	85.2%
	Women	76.8%	73.6%	11.2	673	83.4%
	Total	85.1%	75.9%	10.5	840	84.4%
	I quintile	68.4%	41.2%	7.6	279	59.1%
	V quintile	94.2%	87.1%	12.7	1359	93.3%

Source: Longitudinal Social Protection Surveys (ELPS in Spanish). Latest survey year: Chile (2015); Colombia (2012); Paraguay (2015); El Salvador (2013); Uruguay (2013).

Like the previous section, we estimate the pension benefit for individual workers and compare it to what would have been obtained in a hypothetical savings plan in a safe asset. In the case of Colombia, a traditional defined benefit system (Colombia-RPM) exists parallel to a defined contribution system (Colombia-RAIS) in which workers can migrate from one another. Therefore, this hypothetical exercise corresponds to the actual choice that workers must make as they near retirement. We provide calculations for taxes and subsidies in both systems.

To estimate pension entitlements, we proceed as follows. From each country, we take all workers near retirement age, between 40 and 50 years of age, with positive income at the time of the survey (regardless of whether they contribute to pensions or not).⁸ Each worker reports years worked and years contributed to the pension system. We project each worker’s remaining years of contributions and potential wages until the country’s gender-specific minimum retirement age. We assume that the remaining density of contributions (years contributed over total potential years contributed) is equal to the past density of contributions. Similarly, we impute their wage forward and backward in time using the average age and education profile of the county by formal and informal status separately.

With the estimated history of contributions and wage profiles, we calculate the individual pension entitlements at the minimum retirement age for each worker. We then compare this pension with the pension that would have resulted from investing those contributions in a safe asset and converting it into a fair annuity at the time of retirement. We set that rate of return to be 3.5%. We do this for men and women separately using gender-specific mortality tables to estimate the fair annuity (see Altamirano et al., 2018 for details).

The set of tables in this section shows the results of this exercise. In each table, we report by income decile, the share of workers who qualify for a pension (because they contribute the minimum number of years required to become eligible), the average replacement rate, and monetary subsidies for workers not eligible for a pension, workers eligible for a pension and all workers. In the case of Chile, since there is no minimum number of years required to access a benefit, we assume that all workers are eligible for a pension. We present the results separately for men and women in Appendix III.

We present the results for Colombia-RPM and Paraguay in Tables 4 and 5, two countries with a traditional defined benefit system a relatively low formality rate and high required number of contributions to qualify for a pension (26 and 25 years, respectively). A few results merit attention. First, the share of workers that qualify for a pension is low and increases with income. Very few workers in the lower income deciles qualify for a pension. Less than 5% of income deciles four and lower achieve the required years of contributions to obtain a pension, but even for high-income workers, it remains low. Only 25–45% of workers in the highest two income deciles qualify for a pension. Second, conditional on a long history of contributions, replacement rates are larger for low-income workers in Colombia. A worker in the third income decile in Colombia receives a replacement rate of 100% of the pension vs 49.5% in the tenth income decile.⁹ This is due to the existence of a highly subsidized minimum pension and a benefit formula that decreases with income. However, replacement rates are relatively flat in Paraguay as the benefit formula does not change with income. In both countries, when we account for all workers who do not qualify for a pension, average replacement rates increase with income. Fourth, large monetary subsidies accrue for high-income workers in both countries. The subsidies to finance a high-income pension can be more than 100 000 US dollars. Finally, the pension system acts as a pure tax for many workers. The overall tax paid is increasing with income. These workers contributed for many years but did not qualify for a pension. For, example, on average, a worker in Paraguay in the tenth decile who does not qualify for a pension pays a tax equivalent to 29 000 US dollars. An important difference between these two countries is that Colombia returns the contributions adjusted by inflation to the worker who does not reach the minimum years of contribution necessary to quality for a minimum pension (a rare exception in the region)¹⁰. The taxes computed here correspond to the interest rate not received on those contributions.

Table 4

Replacement rates and implicit monetary subsidies: Colombia-RPM

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	3.8%	0.2%	100.0%	14.4%	−139	122 133	4553
2	4.4%	0.2%	100.0%	7.2%	−259	111 809	4693
3	3.6%	0.2%	100.0%	4.3%	−337	107 382	3567
4	6.8%	0.5%	85.4%	6.3%	−869	104 238	6315
5	21.1%	0.9%	77.1%	17.0%	−2068	98 548	19 164
6	14.1%	0.7%	69.3%	10.3%	−1716	94 977	11 874
7	15.6%	0.9%	55.5%	9.4%	−2639	91 079	12 026
8	27.4%	0.9%	51.7%	14.9%	−3479	94 173	23 317
9	29.4%	1.2%	51.0%	15.8%	−6159	131 611	34 398
10	45.6%	1.4%	49.5%	23.3%	−14 906	242 347	102 330

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.

Table 5

Replacement rates and implicit monetary subsidies: Paraguay

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	0.3%	0.0%	87.7%	0.3%	−1601	51 624	−1444
2	1.5%	0.0%	66.7%	1.0%	−2441	80 755	−1226
3	0.3%	0.0%	71.4%	0.2%	−2407	91 889	−2108
4	2.5%	0.0%	72.1%	1.8%	−3657	107 702	−921
5	4.5%	0.0%	68.8%	3.1%	−4543	123 913	1218
6	5.9%	0.0%	71.5%	4.2%	−6256	134 933	2049
7	10.3%	0.0%	71.9%	7.4%	−7620	153 689	8979
8	17.6%	0.0%	73.4%	12.9%	−12 574	214 440	27 372
9	36.8%	0.0%	73.0%	26.9%	−19 560	276 243	89 241
10	25.6%	0.0%	71.6%	18.3%	−29 032	411 439	83 599

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Paraguay, these workers do not receive any payment from the system.

Table 6 shows the results for Uruguay¹¹. Like Paraguay and Colombia, Uruguay has a defined benefit pillar with similar redistribution components. However, Uruguay is substantially more formal, with around 70% of workers contributing to pensions at any given time. Uruguay has a complementary defined contribution pillar, but this has no impact on redistribution, and we do not model it in this exercise. The replacement rates for those workers who qualify for a pension are relatively flat. The share of the subsidies/tax patterns are akin to Colombia and Paraguay, with low deciles of the income distribution receiving lower overall subsidies. However, given the higher formality and contribution rates in Uruguay, the taxes for those who do not qualify are substantially higher. The average tax for a worker who does not qualify for a pension in Uruguay in the fifth decile is 11 000 US dollars. Another important redistribute policy in the case of Uruguay is the maximum pensions, which dramatically lowers subsidies for workers at the top of the income distribution. The average worker in the 10th decile of the income distribution pays a tax of around 19 000 US dollars.

Table 6

Replacement rates and implicit monetary subsidies: Uruguay

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	24.3%	0.0%	54.9%	13.3%	−1916	17 636	2832
2	25.5%	0.0%	54.8%	14.0%	−3484	31 857	5543
3	29.6%	0.0%	55.5%	16.5%	−6945	41 889	7527
4	39.8%	0.0%	55.8%	22.2%	−10 977	50 131	13 353
5	35.2%	0.0%	55.8%	19.7%	−11 138	51 005	10 765
6	48.1%	0.0%	55.9%	26.9%	−14 111	64 587	23 719
7	55.7%	0.0%	55.4%	30.8%	−18 443	75 412	33 842
8	59.9%	0.0%	55.6%	33.3%	−20 844	82 226	40 915
9	59.6%	0.0%	55.7%	33.2%	−29 068	102 085	49 110
10	71.4%	0.0%	29.0%	20.7%	−56 086	−4941	−19 578

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Uruguay, these workers do not receive any payment from the system.

Tables 7, 8 and 9 show the results for El Salvador, Colombia-RAIS and Chile. These three countries have defined contribution systems. In principle, all workers retain all their capitalized savings, so no taxes are associated with these systems. All three systems have some redistributive components built in. EL Salvador and Colombia have minimum pensions obtained after 25 and 23 years of contributions, respectively. Chile offers a solidarity pension to those that have not contributed to the system (and are among the 60% poorest) and additional explicit subsidy to top up the capital accumulated in the individual accounts. Clear patterns emerge. Both subsidized replacement rates and monetary subsidies are decreasing in income (for those workers that qualify for a pension). In Colombia and El Salvador, a worker in the 4th decile receives a subsidy of 100 000 US dollars and 70/80 pp in the replacement rate. A worker in the 10^th deciles receives 30 000 and 60 000 in Colombia and El Salvador respectively. Like in defined benefit systems, a substantial number of workers do not qualify for a minimum pension, particularly in the low part of the income distribution.

Table 7

Replacement rates and implicit monetary subsidies: El Salvador

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	4.1%	0.1%	100.0%	12.8%	0	1,13 818	4667
2	1.9%	0.3%	100.0%	2.7%	0	103 767	1932
3	1.0%	0.2%	100.0%	0.2%	0	103 767	1932
4	4.9%	0.4%	94.0%	5.0%	0	107 068	5274
5	13.1%	0.6%	71.7%	9.9%	0	100 637	13 215
6	15.7%	1.1%	57.8%	10.0%	0	94 547	14 800
7	16.1%	1.1%	46.6%	8.4%	0	93 275	15 003
8	40.7%	1.0%	39.6%	16.7%	0	90 990	37 061
9	34.8%	1.3%	30.7%	11.5%	0	81 349	28 316
10	55.6%	1.9%	19.2%	11.5%	0	62 487	34 764

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a minimum pension. In El Salvador, those who do not get the minimum years of contributions receive their contributions and accumulated interest back. This is shown in the table as the replacement rate resulting had those contributions been annuitized.

Table 8

Replacement rates and implicit monetary subsidies: Colombia-RAIS

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	5.0%	0.2%	100%	17.4%	-	1,22 789	6085
2	5.0%	0.3%	100%	8.1%	-	1,12 917	5643
3	3.9%	0.3%	100%	4.8%	-	108 496	4257
4	8.3%	0.5%	86.5%	7.7%	-	105 943	8832
5	23.5%	1.1%	77.2%	19.0%	-	100 302	23 606
6	15.7%	0.8%	69.6%	11.6%	-	96 672	15 187
7	17.7%	1.0%	55.7%	10.7%	-	92 871	16 459
8	30.3%	1.0%	47.1%	15.0%	-	83 760	25 412
9	34.3%	1.2%	33.1%	12.2%	-	65 362	22 449
10	51.2%	1.2%	20.2%	11.0%	-	31 732	16 254

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a minimum pension. In Colombia-RAIS, those who do not get the minimum years of contributions receive their contributions and accumulated interest back. This is shown in the table as the replacement rate resulting had those contributions been annuitized.

Table 9

Replacement rates and implicit monetary subsidies: Chile

Labor Income Decile	Share of workers eligible for a pension (%)	Average replacement rate (% of final pay)			Average monetary subsidies (2014 PPP dollars)
		Workers not eligible for a pension	Workers eligible for a pension	All Workers	Workers not eligible for a pension	Workers eligible for a pension	All Workers
1	100.0%	0.0%	94.6%	94.6%	-	56 377	56 377
2	100.0%	0.0%	42.2%	42.2%	-	52 922	52 922
3	100.0%	0.0%	36.7%	36.7%	-	48 208	48 208
4	100.0%	0.0%	34.1%	34.1%	-	46 977	46 977
5	100.0%	0.0%	29.7%	29.7%	-	47 000	47 000
6	100.0%	0.0%	26.3%	26.3%	-	40 232	40 232
7	100.0%	0.0%	12.7%	12.7%	-	0	0
8	100.0%	0.0%	13.8%	13.8%	-	0	0
9	100.0%	0.0%	13.3%	13.3%	-	0	0
10	100.0%	0.0%	14.4%	14.4%	-	0	0

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. In the case of Chile, we assume that since there is no minimum pension, all workers obtain a pension. We also assume perfect targeting and input the solidarity pension to the 60% of the workers in the lower income deciles according to an established formula.

At this point, it is important to compare Colombia’s individual account system (Colombia-RAIS) with its defined benefit system (Colombia RPM) as they operate in parallel, with different benefit rules, and workers can transfer between systems up 10 years before of the minimum retirement age. Two results merit attention. First, for every income decile the share of workers that qualify for a pension is higher in the individual account system as it requires 23 instead of 26 years of contributions. This also leads to a slightly higher subsidized system at the bottom part of the income distribution. Second, for high-income workers monetary subsidies can be up to 8 times more in the defined benefit system (240 000 vs 30 000 US$).

Chile (Table 9) is a special case. Chile is one of the few countries fully integrating non-contributory and contributory pillars, establishing a solidarity pillar in 2008. The design of the solidarity pillar deserves some attention. People with no contributions to the system (and belonging to the poorest 60% of the population) will receive a solidarity basic pension. People who did accumulate pension savings but for whom the base pension lies below a particular level are eligible for an explicit subsidy (see Bosch et al., 2013 for details). The magnitude of this subsidy declines with the level of savings. In 2022 this pillar has been expanded to increase up to 90% of the population. For illustration, we model the previous design setting and assume that the six first deciles of the workers in our distribution will be beneficiaries of the subsidized pension. Still, it is important to acknowledge that this targeting could be imperfect. Several facts merit attention. In this case, by construction, all the subsidies are in the lower part of the income distribution. Replacement rates are substantially higher for low-income workers. Workers in the first decile of the income distribution present a replacement rate of 94.6% compared to 14.4% for workers in the 10th decile of the income distribution. Additionally, since the subsidy formula is such that the subsidy amount declines with the accumulated savings, the dollar amount of subsidies also declines with income. Workers in the first decile of the income distribution receive, on average, a subsidy equivalent to 56 000 US$ compared to 40 000 US$ for a worker in the 6th decile of the income distribution.

Comparing intended and actual redistribution

In all, except for the case of Chile, the systems analyzed in this paper present redistributive properties that are very different from their intended design. To illustrate this, Fig. 7 presents the accumulated share of subsidies by income decile for the countries above analyzed. We present two scenarios. First, what would be the cumulative distribution of subsidies if all the workers in each decile behaved like the average worker eligible for a pension in that income decile (100% coverage). And second, what ‘actual’ distribution of subsidies is. Several facts merit attention. First, all systems except for Chile are much less progressive than their design will imply. In all systems, the distribution of subsidies if all workers had qualified for a pension is much closer to (or above) the equality line than the actual distribution of subsidies. Second, in defined benefit systems like Paraguay and Colombia, the three highest labor income deciles concentrate 70–95% of all subsidies. Had all the workers qualified for a pension, the subsidies for the 3 highest deciles would have been between 40% and 50% of the total subsidies. Third, in defined contribution systems, if all the workers qualified for pensions, low-income workers would have received a larger share of the subsidies since they would be the main recipients of minimum pensions. However, because low-income workers present a low density of contributions, they do not qualify for minimum pensions; between 50–60% of subsidies concentrate in the high-income deciles. In Chile, since every worker among the 60% of poorest households receives subsidies regardless of their history of contributions and we assume perfect targeting, both lines lie above the equality line.

Figure 7

Distribution of monetary subsidies across income deciles: Intended vs actual redistribution. Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution

The role of non-contributory pensions

The results presented above constitute the redistribution that occurs within the contributory systems. However, all countries studied here have established non-contributory pillars to mitigate the lack of coverage on their contributory systems (Bosch et al., 2013; Rofman et al., 2013). These non-contributory pillars constitute pure transfers and depending on their generosity and targeting they can substantially change the distribution of subsidies presented in the previous section. Table 10 shows the level of non-contributory pensions and the coverage of the five countries circa 2020.

Table 10

Non-contributory pension (NCP) and semi-contributory programs (Chile’s APS), key parameters (circa 2020)

Country	Minimum requirement age	Share of adults 65+ receiving NCP*	Average monthly grant amount (LCU, circa 2020)*	Average lifetime annuity from non-contributory pensions (2014 PPP dollars)
Chile	65	28.1%	148 766	59 576
Colombia	59 (M), 54 (W)	29.1%	89 447	12 819
El Salvador	70	5.1%	50	29 031
Paraguay	65	46.5%	515 432	47 316
Uruguay	70	4.4%	6170	51 294

Source: Prepared by the authors based on national legislations. ^*Data from the Labor Markets and Social Security Information System (SIMS). M denotes Men; W denotes Women. PPP refers to purchasing power parity dollars. LCU refers to Local Currency Units.

We perform two exercises to illustrate the potential impact of NCP on the distribution of subsidies. Our data do not identify who would be the recipient of the non-contributory pension. We compute two additional scenarios in which we provide the existing non-contributory benefit to workers in the first 3 or 6 deciles of the income distribution who are not eligible for a contributory pension for each country. Figure 8 shows the main results of these calculations.

Figure 8

Distribution of subsidies in the presence of non-contributory pensions. Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution

As expected, the share of subsidies that accrue to the first three deciles declines with the expansion of non-contributory pensions in all counties. For instance, in Paraguay, in the absence of non-contributory pensions 97% of subsidies are received by the top three deciles of the income distribution. If non-contributory pensions are implemented for the bottom three (six) deciles of the income distribution, this number falls to 82% (71%). Qualitatively, similar results are found for other countries. However, the ultimate impact of non-contributory pensions depends on its generosity and the previous distribution of subsidies. In countries with defined contribution systems where contributory pensions are relatively low, there are only minor changes in the distribution of subsidies.

Differences between men and women

There are two main differences between men and women in this exercise that are common in all five counties. First, women represent a lower share of workers between 40–50 years old in our sample. On average they represent 38% of all workers. And second, women are overrepresented among low-income deciles, with relatively lower contribution densities. However, conditional on income decile, we do not observe systematic differences between the share of women who are eligible for a pension, the replacement rates, or the average subsidy received (see tables in Appendix II).

Because women have a weaker link with the pension system, they are also less likely to benefit from implicit subsidies (see Fig. 9). Women receive 49%, 46%, 41%, 32%, 22% and 18% of the subsidies in Uruguay, Chile, El Salvador, Paraguay, Colombia RPM and Colombia RAIS.

Figure 9

Percentage of total subsidies accrued to men and women with and without non-contributory pillars. Source: Authors’ calculations. Note: The baseline scenario does not grant non-contributory pensions. Scenario I targets non-contributory pensions to workers who are not eligible for a minimum pension and are in the first three income deciles, and scenario II grants non-contributory pensions to workers in the first 6 income deciles

Similarly, because women are concentrated in the lower income deciles, the expansion of non-contributory pillars is bound to have a gender-equalizing effect in the distribution of subsidies. For instance, a non-contributory pension focused on the first three deciles will increase the share of subsidies accrued to women in 16, 10, 8, 7 and 2 percentage points in Uruguay, Paraguay, El Salvador, Chile and Colombia (both private and public systems). It is important to note that these are the subsidies received by the sample of working individuals. Women are more likely to be outside the labor force and would benefit even more from non-contributory pillars. Hence, this is a lower-bound estimate of the effects of noncontributory pensions on the share of subsidies received by women.

Discussion and conclusions

Pension systems are social contracts that aim to reduce poverty and smooth consumption in old age. These are complex contracts to interpret for several reasons. First, these are very long-term contracts in which, for several decades, citizens contribute to the system and, for another two or three decades, receive benefits from the system. Second, individuals with different characteristics and work histories will obtain very different benefits (which are not necessarily related to their proportional participation in the program). Third, there is no single transparent way to measure the relationship between entitlements and contributions. This makes establishing measures of equity or financial redistribution challenging.

Pensions constitute one of the major social programs in LAC and absorb an important part of the budget in many countries. Given the aging process, an increasing share of public spending will be devoted to paying for pensions. This paper shows that though most regional pension systems are designed to be progressive in providing higher replacement rates to low-income workers, in many countries, the implicit subsidies are highly concentrated among high-income workers. This is more acute in defined-benefit systems, which are generous to those who obtain a pension and impose a tax on those who do not. Given the level and pattern of informality in the region’s labor markets this result is a highly inequitable distribution of subsidies. This also occurs, to a lesser extent, in defined contribution systems, where very few low-income workers become eligible for minimum pensions.

This exercise has some caveats. First, the key to defining the level of subsidies in pension systems is the need to define a counterfactual scenario. Establishing what fair annuity workers should receive, given the level of contributions, is a central question that countries should clearly answer. However, this rarely happens, and assumptions need to be made. Second, we focus on the impact of redistribution within the main contributory pension systems. To fully assess the distributional impact of pension programs from a lifetime perspective requires longitudinal data, which not only tracks individuals over the entirety of their adult lives but also includes all the necessary information for computing individuals’ other tax liabilities and for determining their eligibility for different transfers as well as other sources of financing of pension systems. Even in the few countries where sufficiently long-running administrative or longitudinal survey data are available, not all include all the information needed. Third, the exercises proposed here do not consider the behavioral responses of workers to the incentives provided by the parameters in the systems. For instance, we do not allow individuals to work after the minimum retirement age, even though some workers may qualify or obtain a higher pension. Fourth, there are redistributive elements that have not been considered in this analysis, such as the impacts of differential mortality across income groups. Finally, it is important to note that while the focus of this paper is on within-generation redistribution, there is considerable evidence that inter-generational redistribution of pension systems has been substantial, with early generations usually benefiting with high returns to contributions (See Forteza & Mussio, 2011). These caveats should inform a future research agenda on this topic in LAC.

Pension systems can be designed to be more progressive. First, countries can reduce or eliminate the minimum number of years required to access benefits and provide a proportional benefit, this would eliminate the implicit tax workers who do not become eligible for pension because of their reduced number of contributions. These tend to be low-income workers. Second, countries can establish a more direct link between contributions and benefits. For instance, determining benefits that are the result of a notional equilibrium return that is linked to a sustainability formula. This would reduce the subsidies the systems provide, particularly in the upper part of the income distribution. Finally, direct subsidies through the pension system could be made explicit and targeted towards the lower part of the income distribution. One way of doing this is through well targeted non-contributory pensions or subsidies to the contribution of low-income workers. As this paper shows, current levels of non-contributory pensions can improve the redistribution properties of pension systems in the region if subsidies are directed to the poorest individuals. One of the key implications is that countries should constantly monitor their pension systems to understand their effect on income or wealth inequality. This could provide insights about potential reforms, given a desired level of redistribution.

However, the central message of this paper is that most of the unequal redistribution occurring in LAC pension systems is due to the fact that many low-income workers will not qualify for pensions. Although changes in pension design are important to mitigate unintended redistribution, contributory pension coverage will remain low and unequal without addressing the fundamentals for the large informal sectors in LAC (Levy, 2017). Levy (2008) argues that separating contributory and non-contributory benefits promotes informality and low-productivity growth, as formally employed workers pay for bundled benefits. In contrast, informal workers receive non-contributory programs without contributing. One potential avenue of reform is integrating these benefits into a universal system funded not only by contributions but by additional tax resources (i.e. VAT) to mitigate labor market distortions. Further research is needed to understand how these pillars should be integrated to expand coverage and reduce disincentives to contribute and the incidence of different types of taxation on overall redistribution.

Increasing coverage of informal workers is, hence, paramount to improving redistribution. Outside the main contributory systems, some savings programs for low-income informal workers are being established in LAC with redistributive elements. In Colombia, Beneficios Economicos Periodicos is a public program that allows informal workers to make retirement savings deposits without fees and provides some subsidies at the end of their working lives. In Mexico, leveraging technology and mobile banking, the regulator is aiming to connect informal workers to formal voluntary pension savings through an app AforeMovil, with some built-in rewards (Bosch et al., 2021a). However, the effect of those programs on saving rates tends to be small, and quantitatively, very limited redistribution occurs compared to the main contributory systems and non-contributory pensions.

Without reforms, aging implies complex dynamics for redistribution. In defined benefit systems, longer life expectancies imply increasing subsidies, and given the current distribution of subsidies in many countries, inequities are increasing. For individual capitalization systems, longer lives imply a reduction in replacement rates (as with the same level of accumulated capital, annuities will be lower). This will be an unpopular outcome and will question their social sustainability. Without changes, this could also lead to more subsidies since achieving the necessary capital to attain a minimum pension will be more difficult. In this context, inaction is not an option for public policymakers in the face of the challenges presented by pension systems. Countries should improve the governance and the institutions to achieve a more equitable redistribution through the pensions systems (Bosch et al., 2021b).

AUTHORS’ CONTRIBUTION

Alvaro Altamirano: Conceptualization, Writing – Original Draft Preparation, Formal Analysis. María Laura Oliveri: Conceptualization, Writing – Original Draft Preparation, Formal Analysis. Mariano Bosch: Conceptualization, Writing – Original Draft Preparation, Writing – Review & Editing. Waldo Tapia: Conceptualization, Writing – Original Draft Preparation, Writing – Review & Editing.

STUDY FUNDING and APC FUNDING

This research was funded by the Inter-American Development Bank (IADB). The opinions expressed in this publication are those of the authors and do not necessarily reflect the views of the (IADB), its Board of Directors, or the countries they represent.

CONFLICT OF INTEREST

The authors declare no conflict of interest related to this study.

DATA AVAILABILITY

The data supporting the findings of this study, Longitudinal Social Protection Survey, are available at the Inter-American Development Bank’s Social Security and Labor Markets Information System.

Footnotes

1

See Fouejieu et al. (2021) for a discussion on intergenerational redistribution and summary of recent parametric reforms and their effects on fiscal sustainability and intergenerational equity in Europe.

2

There is a related literature that examines the impact of pension systems on the distribution of income and wealth (see Atkinson et al. 1995; Belloni et al. 2019; Coronado et al. (2011) and Lustig 2022).

3

See Appendix I for detailed description of terms.

4

Most defined contribution systems allowed for other retirement products such lump-sum withdrawals or periodic withdrawals. These are not considered in this paper.

5

This corresponds to beneficiaries born in 1973 retiring in 2038 with average income.

6

For example, in the case of defined benefit systems, if the subsidies were established at returns over 2%, all countries would provide subsidies. If the benchmark interest rate was 5% instead of 3.5%, 12 cases would present subsidies instead of 19, and 8, instead of 3, would present taxes. However, patterns across income levels will be qualitatively the same.

7

Except for Ecuador, Mexico and Haiti, where replacement rates are constant across income levels.

8

We also run a model with all cohort individuals with very similar results.

9

The very high subsidized replacement rates in the first two deciles correspond to very few workers that report low wages.

10

These returned contributions are typically very low and result in marginal replacement rates (derived from lifetime annuities) for most workers, as shown in Table 4.

11

Uruguay’s systems allows for different benefits depending on the retirement age, this exercise only captures subsidies and taxes that have accrued at normal retirement age.

12

This is an important simplifying assumption because many social security systems include early/late retirement schemes, or schemes that are specific to certain economic activities (in addition to gender considerations), which impede a regional comparative analysis.

13

Harmonized household surveys in the Labor Markets and Social Security Information System (SIMS for its acronym in Spanish) show that the real income growth of formal workers was 1.7% between 1990 and 2016.

14

The distribution of marital status for people over the age of 65 indicates that high rates of marital union and widowhood remain among older adults in the region. Considering both formal and consensual unions as marital unions, 52.7% of people aged 65 or older declared being married, while 29.9% declared they were widowers (SIMS, 2015).

A. Appendix I: Baseline scenario, hypothetical workers and key terms

To estimate the indicators proposed in this document, assumptions need to be made about hypothetical workers. We start from a baseline scenario with two hypothetical employees: man and woman, both married. In both cases, the man is 3 years older than the woman. Both have contributed throughout their working lives since the age of 20. Both retire at the minimum retirement age between approximately 2030 and 2040 under the rules in force in their country¹², with an average salary of the formal worker that has been growing in real terms by 2%.¹³  Table A1 summarizes the characteristics of these two individuals.

Table A1

Characteristics of hypothetical workers in the baseline scenario

Indicator	Married man	Married woman
Year of retirement	2030–2040	2030–2040
Spouse’s age	Three years younger	Three years older
Age of beginning of working life	20	20
Age of retirement	Minimum retirement age established for men (RM)	Minimum retirement age established for women (RW)
Years contributed/Density of contribution	100%	100%
Salary at the time of retirement	Average formal salary	Average formal salary
Real salary increases	2%	2%
Survival benefits	Yes	Yes
Real interest rate	3.5%	3.5%
Annuity rate	2%	2%

Source: Authors’ assumptions.

Although in regulatory terms some countries do use unisex mortality tables, in all our calculations we use gender differentiated mortality tables. In the case of defined benefit systems, the difference in life expectancy does not necessarily affect the replacement rate (the level of the pension), but it does affect the system’s implicit rate of return and implicit subsidies. For a fixed replacement rate, a longer life expectancy involves greater internal rates of return (and subsidies). Similarly, the differences between single and married men and women stem from the fact that, for married women and men, benefits do not terminate with the death of one spouse, but with the death of both. This fact, which does not affect replacement rates, greatly impacts the internal rates of return and subsidies, given that the average time of receipt of the pension increases.¹⁴

Key Terms.

Defined Benefit (DB). In these systems, pensions are determined based on the worker’s contribution history. Benefits can be established based on the last salary or on a longer period (e.g. the last five or 10 years of contributions).

Defined Contribution (DC). In these systems, the pension is determined based on assets accumulated by an individual during his working life. Benefits can be withdrawn all at once, through scheduled withdrawals, or through an annuity that provides a monthly income until the end of the individual’s life.

Non-contributory pensions (NCP) These pension benefits do not depend on any type of contribution by the individual. They can be granted universally, as in Bolivia, or be focused, e.g. on the condition of a certain level of income or excluding contributory pensions (normally, the State establishes a pension and determines its adjustment over time).

Contribution density. Represents the percentage of effective contributions made by the worker to social security in relation to the contributions that would have been made in an ideal scenario where the worker contributes every month of his/her active labor life. In our baseline scenario, a density of 100% is assumed in all cases.

Rate of return. It is the rate used to capitalize workers’ contributions towards the system during their active working life to determine the present value of pension benefits. In the case of defined contribution pension systems, it is relevant for the calculation of adequacy indicators, although it has also been used to evaluate the implicit rate of return of defined benefit schemes (for comparative purposes).

Longevity risk. In defined benefit systems and in the case of annuities in defined contribution systems, pension providers commit to making payments to their insured for as long as they live. The longevity risk occurs when the provision of capital made by the pension provider is not consistent with the costs associated with unexpected life expectancy. In other words, it arises when the insured outlive their life expectancy.

Mortality rate. The probability that an individual, upon reaching age x, dies during the course of the year that begins on that date. The set of these probabilities is known as ‘mortality tables’ and expresses group or national survival probabilities by age.

Financial risk. Derives from the dependency that pension savings have on the profitability that is obtained from their investment in financial markets, where volatility can produce rates that can even be negative.

Annuity rate. Implicitly represents the cost of annuities when used to calculate the present value of a projected series of benefit payments. Increasing the annuity rate makes the provision of annuities more expensive since it implies greater precautions against the longevity risk; reducing it implies the opposite.

Annuity Factor (AF). The capital that the affiliate needs to finance a monetary unit of pension, from the moment of retirement until a certain time, based on the life expectancy of the affiliate (and of his/her dependents) and the profitability expectations of the pension administrator.

Life annuity. A type of pension or contract that grants its beneficiary a fixed periodic payment (pension) during his/her lifetime.

Programmed withdrawal. A pension modality in which capital saved by the worker is distributed in periodic payments, which are calculated each year based on the balance of the retirement fund, the profitability of the funds, and the annuity rate, among other criteria. It does not offer pension benefits until the pensioner’s death, and the amount of the pension tends to decrease over time.

Minimum and maximum contribution base. It refers to the wage base upon which the contributions are calculated. If the salary is lower than the minimum base (usually associated with the minimum wage), the worker has no obligation to contribute; on the other hand, if it is greater than the maximum, the contribution rate is only applied up to said limit. These parameters are considered invariant throughout the worker’s active life.

Minimum and maximum pension. In most systems, a minimum pension is established when the age and contribution density requirements are met, and some also establish a maximum amount. In many cases, the minimum pension matches the minimum wage.

Spouse survivor’s benefit. In the event of the insured’s death, some systems/countries allow the spouse and/or his/her dependents to continue receiving the benefits under some conditions. In some of the region’s countries, the beneficiary spouse receives 100% of the deceased individual’s pension, although that percentage is usually much lower (40% -70%) and includes restrictions depending on the age and socioeconomic level of the surviving dependent.

B. Appendix II: Additional results by Country and Gender

 

Table A2

Country-level replacement rates by income level

Replacement rates (%)	Times the average formal wage
Country (system)	0.75	1	1.5	2	3
Antigua & Barbuda (DB)	48%	48%	48%	48%	45%
Argentina (DB)	96%	86%	77%	72%	68%
Barbados (DB)	58%	58%	58%	56%	39%
Bahamas (DB)	58%	58%	58%	58%	58%
Belize (DB)	59%	59%	59%	53%	35%
Bolivia (DC)	31%	24%	18%	18%	18%
Brazil (DB)	88%	71%	54%	46%	38%
Chile (DC)	46%	38%	31%	27%	24%
Colombia (DB)	73%	73%	73%	73%	73%
Colombia (DC)	65%	49%	33%	27%	26%
Costa Rica (DB)	75%	75%	73%	72%	68%
Costa Rica (DB + DC)	87%	87%	85%	84%	80%
Ecuador (DB)	95%	93%	92%	91%	91%
El Salvador (DB)	75%	56%	51%	51%	51%
El Salvador (DC)	51%	38%	26%	21%	19%
Guatemala (DB)	67%	67%	67%	62%	41%
Guyana (DB)	59%	59%	59%	55%	37%
Haiti (DB)	31%	31%	31%	31%	31%
Honduras (DB)	68%	59%	40%	30%	20%
Jamaica (DB)	45%	34%	23%	18%	12%
Mexico (DB)	107%	107%	107%	107%	107%
Mexico (DC)	67%	51%	34%	25%	23%
Nicaragua (DB)	90%	68%	66%	66%	66%
Panama (DB)	77%	77%	77%	77%	75%
Panama (DB + DC)	84%	88%	93%	86%	66%
Paraguay (DB)	98%	98%	98%	98%	98%
Peru (DB)	55%	41%	28%	21%	14%
Peru (DC)	34%	34%	34%	34%	34%
Surinam (DB)	74%	74%	74%	74%	74%
Trinidad & Tobago (DB)	74%	56%	39%	38%	30%
Uruguay (DB)	49%	49%	49%	44%	39%
Uruguay (DB + DC)	65%	65%	65%	58%	52%
Venezuela (DB)	29%	22%	14%	11%	7%
Dominican Republic (DC)	62%	46%	31%	23%	21%

Source: Authors calculations based on Altamirano et al., 2018, updated with parameters and data from 2022. These baseline estimates correspond to simple country averages for married men and women who contribute continuously to social security from age 20 until the minimum retirement age mandated by the respective legislation.

Table A3

Country-level monetary subsidies by income level

Implicit subsidies (2022 PPP US$)	Times the average formal wages
Country (system)	0.75	1	1.5	2	3
Antigua & Barbuda (DB)	17 839	23 785	35 677	47 569	43 947
Argentina (DB)	42 268	39 561	34 148	28 735	17 908
Barbados (DB)	30 784	41 046	61 569	73 915	−25 468
Bahamas (DB)	137 108	182 811	274 217	365 622	548 433
Belize (DB)	28 540	38 053	57 080	59 812	16 195
Bolivia (DC)	63 684	34 776	1415	0	0
Brazil (DB)	28 615	−41 494	−160 996	−273 063	−269 814
Chile (DC)	84 151	75 088	56 963	38 838	15 055
Colombia (DB)	127 717	170 289	253 921	318 259	471 336
Colombia (DC)	115 731	89 447	36 877	4162	0
Costa Rica (DB)	168 897	225 196	326 635	419 642	581 849
Costa Rica (DB + DC)	197 356	263 142	388 129	508 142	734 124
Ecuador (DB)	316 774	414 655	610 415	806 175	1 197 695
El Salvador (DB)	106 540	78 094	87 081	116 108	174 162
El Salvador (DC)	82 956	66 956	34 954	12 898	0
Guatemala (DB)	125 366	167 154	250 731	301 341	256 786
Guyana (DB)	44 944	59 925	89 887	95 536	−23 474
Haiti (DB)	381	508	762	1015	1523
Honduras (DB)	112 807	128 348	114 708	101 068	73 788
Jamaica (DB)	20 607	13 248	−1469	−16 187	−33 935
Mexico (DB)	252 369	336 492	504 737	672 983	1 009 475
Mexico (DC)	72 741	58 572	30 235	1898	0
Nicaragua (DB)	88 730	68 955	94 683	126 244	189 365
Panama (DB)	268 860	358 480	537 720	716 961	1 030 063
Panama (DC)	0	0	0	0	0
Paraguay (DB)	101 054	134 738	202 107	269 476	404 215
Peru (DB)	26 145	−8033	−76 391	−144 749	−281 464
Peru (DC)	0	0	0	0	0
Surinam (DB)	10 507	14 010	21 014	28 019	42 029
Trinidad & Tobago (DB)	118 601	90 533	43 296	54 989	−11 384
Uruguay (DB)	−11 350	−15 133	−22 699	−77 244	−281 468
Uruguay (DC)	0	0	0	0	0
Venezuela (DB)	−119	−1388	−3926	−6464	−11 540
Dominican Republic (DC)	92 054	75 811	43 323	10 836	0

Source: Authors calculations based on Altamirano et al., 2018, updated with parameters and data from 2022. These baseline estimates correspond to simple country averages for married men and women who contribute continuously to social security from age 20 until the minimum retirement age mandated by the respective legislation.

Table A4

Replacement rates and implicit monetary subsidies by sex: Paraguay

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	52.3%	0.6%	0.0%	0.3%	87.7%	.	87.7%	51 624	-	51 624
2	45.7%	2.7%	0.0%	1.5%	66.7%	.	66.7%	80 755	-	80 755
3	25.4%	0.0%	1.2%	0.3%	.	71.4%	71.4%	-	91 889	91 889
4	39.1%	2.5%	2.4%	2.5%	70.3%	74.9%	72.1%	101 575	117 339	107 702
5	85.7%	4.9%	4.4%	4.5%	75.2%	67.6%	68.8%	131 886	122 436	123 913
6	74.9%	12.1%	3.8%	5.9%	71.7%	71.2%	71.5%	130 602	139 577	134 933
7	72.4%	9.0%	10.8%	10.3%	69.5%	72.6%	71.9%	146 509	155 989	153 689
8	70.3%	15.2%	18.6%	17.6%	72.2%	73.7%	73.4%	209 956	215 984	214 440
9	73.1%	41.0%	35.2%	36.8%	72.8%	73.1%	73.0%	277 791	275 582	276 243
10	68.7%	35.7%	21.0%	25.6%	74.2%	69.5%	71.6%	358 165	452 792	411 439

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.

Table A5

Replacement rates and implicit monetary subsidies by sex: Colombia (RPM)

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	53.3%	0.7%	6.6%	3.8%	>100%	>100%	>100%	114 189	122 835	122 133
2	61.9%	4.9%	4.1%	4.4%	>100%	>100%	>100%	107 331	115 079	111 809
3	70.3%	5.7%	2.7%	3.6%	>100%	>100%	>100%	104 513	109 931	107 382
4	76.0%	5.6%	7.2%	6.8%	84.6%	85.6%	85.4%	98 903	105 554	104 238
5	73.9%	17.8%	22.3%	21.1%	76.9%	77.1%	77.1%	92 918	100 143	98 548
6	75.0%	10.0%	15.4%	14.1%	70.3%	69.1%	69.3%	85 246	97 078	94 977
7	83.7%	11.4%	16.5%	15.6%	61.7%	54.7%	55.5%	87 588	91 551	91 079
8	79.6%	35.6%	25.4%	27.4%	48.7%	52.8%	51.7%	89 770	95 750	94 173
9	78.2%	41.0%	26.2%	29.4%	51.0%	51.0%	51.0%	119 720	136 799	131 611
10	82.3%	37.6%	47.3%	45.6%	48.3%	49.7%	49.5%	206 007	248 562	242 347

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.

Table A6

Replacement rates and implicit monetary subsidies by sex: Colombia (RAIS)

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	53.3%	0.7%	8.7%	5.0%	>100%	>100%	>100%	114 189	123 366	122 789
2	61.9%	4.9%	5.1%	5.0%	>100%	>100%	>100%	107 331	116 242	112 917
3	70.3%	5.7%	3.2%	3.9%	>100%	>100%	>100%	104 513	111 559	108 496
4	76.0%	8.8%	8.2%	8.3%	89.0%	85.6%	86.5%	102 778	107 016	105 943
5	73.9%	19.1%	25.1%	23.5%	76.8%	77.3%	77.2%	93 877	102 034	100 302
6	75.0%	13.1%	16.6%	15.7%	71.3%	69.2%	69.6%	90 208	98 366	96 672
7	83.7%	15.3%	18.2%	17.7%	60.9%	54.9%	55.7%	91 528	93 091	92 871
8	79.6%	38.6%	28.2%	30.3%	45.5%	47.7%	47.1%	82 415	84 231	83 760
9	78.2%	46.5%	30.9%	34.3%	34.5%	32.6%	33.1%	63 817	66 012	65 362
10	82.3%	48.2%	51.9%	51.2%	21.4%	20.0%	20.2%	38 420	30 396	31 732

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.

Table A7

Replacement rates and implicit monetary subsidies by sex: Uruguay

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	19.6%	20.4%	40.4%	24.3%	55.6%	53.5%	55.0%	14 091	10 157	12 813
2	27.6%	18.2%	44.8%	25.5%	55.4%	54.4%	54.9%	28 875	15 928	22 618
3	41.3%	25.6%	35.4%	29.6%	56.8%	54.2%	55.5%	37 178	21 073	29 242
4	41.4%	35.1%	46.4%	39.8%	56.5%	55.0%	55.8%	45 753	23 318	34 924
5	66.2%	34.1%	35.8%	35.2%	57.2%	55.1%	55.8%	48 124	26 338	33 463
6	54.3%	46.6%	49.3%	48.1%	56.8%	55.1%	55.9%	59 550	31 283	43 809
7	54.1%	50.4%	60.2%	55.7%	55.6%	55.3%	55.4%	72 941	35 770	51 213
8	69.9%	54.2%	62.4%	59.9%	56.6%	55.3%	55.6%	85 836	41 152	53 302
9	77.4%	54.4%	61.1%	59.6%	56.9%	55.4%	55.7%	105 373	53 562	64 237
10	69.3%	70.4%	71.8%	71.4%	33.6%	27.0%	29.0%	16 924	−58 993	−35 987

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized.

Table A8

Replacement rates and implicit monetary subsidies by sex: Chile

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	37.6%	100%	100%	100%	99%	88%	95%	53 222	61 593	56 371
2	45.2%	100%	100%	100%	44%	40%	42%	51 384	54 709	52 886
3	58.4%	100%	100%	100%	37%	36%	37%	49 048	47 609	48 208
4	52.8%	100%	100%	100%	35%	33%	34%	45 951	47 895	46 977
5	67.4%	100%	100%	100%	31%	29%	30%	44 593	48 134	46 980
6	62.3%	100%	100%	100%	27%	26%	26%	40 266	40 278	40 274
7	78.0%	100%	100%	100%	12%	13%	13%	0	0	0
8	71.5%	100%	100%	100%	11%	15%	14%	0	0	0
9	72.7%	100%	100%	100%	14%	13%	13%	0	0	0
10	70.6%	100%	100%	100%	13%	15%	14%	0	0	0

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.

Table A9

Replacement rates and implicit monetary subsidies by sex: El Salvador

Labor Income Decile	Share of Men per Decile	Share of workers eligible for a contributory pension (%)			Average replacement rate for workers eligible for a contributory pension (% of final pay)			Average monetary subsidies for workers eligible for a contributory pension (2014 PPP dollars)
		Women	Men	All	Women	Men	All	Women	Men	All
1	27.5%	4.1%	4.2%	4.1%	>100%	>100%	>100%	116 716	106 372	113 818
2	44.2%	0.0%	4.2%	1.9%	.	>100%	>100%	-	103 767	103 767
3	40.7%	0.0%	0.0%	0.0%	.	.	.	-	-	-
4	44.9%	4.6%	5.3%	4.9%	91%	97%	94%	111 728	102 064	107 068
5	49.0%	9.7%	16.7%	13.1%	77%	68%	72%	107 711	96 358	100 637
6	63.1%	7.4%	20.5%	15.7%	61%	57%	58%	102 903	92 771	94 547
7	60.6%	9.6%	20.3%	16.1%	50%	45%	47%	102 978	90 279	93 275
8	56.9%	46.5%	36.4%	40.7%	40%	39%	40%	96 841	85 318	90 990
9	68.9%	22.8%	40.2%	34.8%	32%	30%	31%	89 709	78 959	81 155
10	49.0%	58.2%	52.9%	55.6%	20%	18%	19%	70 823	52 930	62 487

Source: Authors’ calculations. Notes: Estimates represent average subsidies per labor income decile by applying each system’s pension rules in effect during the year the survey was conducted. Pension eligibility parameters are defined within each system (e.g. vesting periods for contributory or minimum-guaranteed pensions). Income groups are deciles, defined as 10 percentiles of labor income according to each country’s distribution. PPP refers to purchasing power parity dollars. Workers who do not reach minimum years of contributions by retirement age are not eligible for a pension. In Colombia-RPM, those not eligible for a pension receive their contributions back, adjusted by inflation. This is shown in the table as the replacement rate resulting had those contributions been annuitized. These workers still pay taxes through the system as their contributions return with 0 real interest rate.