Book reviews for The Journal of Pension Economics and Finance reflect reviewers' own views and in no way represent the views of the institution(s) with which they are affiliated.
This book gives a very comprehensive survey of Pension and Health reforms in Latin America, providing detailed information of each country and an interesting analysis. The book allows the reader to understand differences among countries and draw lessons for future reforms in Latin America or other regions of the world. As mentioned by the author, in the preface, this subject gets into very controversial issues, many of them charged with ideology and the book reflects a genuine attempt to keep objectivity. However, in this field – as in many others – objectivity is very difficult to obtain and even solid data can be interpreted in different ways and there are always problems or caveats when comparisons are made.
The name of the book is very evocative: Reassembling Social Security, and as stated in the Introduction section the world has changed and there is a new paradigm in social security provision. I think this reflects very much the situation of ‘pension’ issues around the world. The author mentions that this transformation is recognized by the International Labor Office (ILO); in fact, the way in which pension reforms are analyzed in the book takes on board a set of fundamental principles that somehow, according to the author, reflect the ILO's approach to this topic.
The book organizes pension reform analysis around the following six principles: ‘(a) universal coverage; (b) equal treatment; (c) solidarity and income distribution; (d) comprehensiveness and sufficiency of benefits; (e) unity, state responsibility, efficiency, and social participation in the administration; and (f) financial sustainability’. Latin American reforms are assessed by the author in terms of its achievements with respect to each of these principles.
In terms of the first of these principles, universal coverage, the book provides a set of statistics for the different Latin American countries and acknowledges the difficulties in interpreting and comparing such statistics. In fact, there are different figures depending on the source of the information. In addition to what the author discuss, when coverage is measured as the number of contributors as a percentage of the labor force in a given year, this does not necessarily mean that this percentage of workers would have the right to a pension in the future. In some cases, in a defined benefit system, the contributor might not comply with the requirements to be entitled to a benefit at all, and in the case of a defined contribution system; the amount of saving could be too low to consider the benefit received as a ‘pension’.
On the other hand, there are many other conditions, such as labor regulation or economic activity, which affect coverage in a given country at a certain point in time. So to be able to assess the impact of a reform on coverage it is necessary to control for those other factors. Even if the reasons for the low increase in coverage in Latin America could be discussed, there is no doubt that this is one of the most important challenges for Latin American countries. The book provides a number of different policies that go in the right direction and many of them are independent of the type of pension or health system that a country might have.
Another debate that is particularly interesting, in my view, is related to the third principle, solidarity and income distribution. As stated by the author there is a tradeoff between redistribution and incentives. Going beyond what is argued by the author, no matter how solidarity is financed, it would imply distortions. Besides, depending on the tax structure, and administrative or fiscal capabilities of a country, the level of benefits and source of funding should be set accordingly.
The main goals of a pension system are to prevent poverty and provide consumption smoothing. This is reflected in the discussion of the fourth principle, comprehensiveness and sufficiency; however, the appropriate target level for the minimum benefit and the target replacement rate for the system are not so easy to determine. The book mentions that the ILO has set a minimum level at 45% of an average wage earner with thirty years of contribution. However, the book recognizes that the appropriate level depends on many factors, such as the saving capacity of the country, the needs of people in old age and how they are satisfied in other ways (such as health), and other sources of retirement income, among others. Additionally, I consider that it is especially important to clearly state the target level, whatever it is. Consequently, there would be awareness of the population with respect to the level of pensions that will be achieved by the compulsory contributory pillar and the solidarity pillar as well. Depending on the way in which this pillar is designed there will be also uncertainty about the level of pension and therefore transparency should include ways in which workers could be informed about their personal situation. (In Chile, the Pension Supervisor has developed a pension simulator available at: www.spensiones.cl which includes pension risk).
Under the author's evaluation of the principle of financial sustainability it is stated that one of the goals of a private pension reform is usually the promotion of national savings, capital market and returns. The author argues that a structural pension reform by itself would not have a positive impact on the overall economic development of a country, given that other conditions and policies are necessary. Other reforms to be considered in parallel include fiscal reforms, which would ensure fiscal sustainability, as well as financial reforms, necessary to have appropriate financial instruments for pension funds to invest in and a capital market in which these instruments would be traded transparently.
However, at the same time it should be said that when pension reforms are undertaken, given the magnitude and relevance of the pension system with respect to the country's economy, the way in which the reforms are designed and implemented could contribute negatively or positively to the overall economy and their impact should not be underestimated. These effects on economic growth could reinforce the achievement of the reforms’ main goal, to provide adequate pensions, or on the contrary, it could imply financial difficulties or distortions on the labor or capital market with a negative impact on pensions, and consequently weakening the pension system itself. Therefore, we can have a vicious or a virtue circle depending on the impact of the reform over the whole economy.
As well the book reminds us of the origins of pension systems in Latin America and the differences in the starting point of each country, where the common factor is that they all started as pay as you go systems, similar to the ones existing in other parts of the world in those years. It is mentioned that labor markets in Latin America were different at the time of the initial systems and the level of informality was very high in most Latin American countries. I would add to this that there is something that has changed substantially in many countries, and Latin America is not an exception, from the time when these systems started. This is life expectancy. During the beginning of the previous century life expectancy was closer to the 60 s which was at the same time the retirement age; therefore pension systems could be thought of as insurance against the ‘risk’ of living too long and being unable to work. Every worker then paid an insurance premium to cover this risk. However, currently the probability of the retirement age is very high and not only that, it is also the case that once retirement age is achieved the number of years remaining is not small. Therefore, the cost of the insurance has increased significantly and it has even put at risk the sustainability of pay as you go systems. If we think about it, insurance is a very good instrument when there is a low probability for a costly event; but once the event has a high probability the pooling advantage of the insurance diminishes. There is space then for saving as a way of financing retirement if at the age at which benefit is obtained implies that the individual will have very likely a significant number of years to live. At the same time, we might think that there is also space for insurance at a later stage, given that there is a probability of achieving very high ages that imply costly long-term care. This is something countries might want to start thinking about. This issue of providing insurance for long-term care is not addressed in the book.
There are multiple challenges in pension reform worldwide and this book is an important contribution to the pension discussion and reminds us the importance of differences among countries, even in the same region, and that a pension reform cannot be isolated from the overall economy. Therefore, the objective of the author of contributing to the debate is surely attained and Reassembling Social Security should be a reference book for policy makers when pension reforms are designed.
