As LatAm populations age, pension pressure grows

Population ageing in Latin America will increase fiscal pressure on governments in the area of pension obligations over the next decade and beyond, rating agency Moody's said.

The combination of shrinking labor forces and growing armies of retirees will particularly affect nations with defined-benefit (DB) schemes - or pay-as-you-go plans - such as those in Brazil and Argentina.  

Pension system sustainability is a major issue in the region, particularly in Argentina, Brazil and Colombia, where reining in government spending in this area is seen as a vital part of efforts to improve state finances.

"Pension-related spending is already adding pressure to government spending in some countries, including Argentina, Brazil, Colombia, Chile and Uruguay," said Moody's VP Samar Maziad.

"In Argentina and Brazil, fiscal pressures are severe, calling for policy action to address rising pension costs and arrest fiscal deterioration. For Chile, the government's strong fiscal position and low debt will limit potential fiscal deterioration, while in Colombia and Uruguay, fiscal space is more limited."

Pension reform, while seen as necessary, is a thorny topic owing to the negative impacts that rule changes often have on vulnerable segments of the population. Policymakers can focus on areas such as retirement age and contribution levels, among other aspects.

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Brazil and Argentina, the region's No. 1 and No. 3 economies, respectively, both have DB schemes, where contributions from workers pay for current retirees' pension obligations.

Brazilian President Jair Bolsonaro has made pension reform a priority and is expected to succeed in getting a package of changes through congress, after his predecessor, Michel Temer failed.

"The IMF projects that the pension deficit in Brazil will increase to almost 9% of GDP in 2030 from around 3.2% of GDP in 2015, highlighting the urgency of pension reform, which has been under consideration for the past two years," Moody's said in a report on the topic.

Argentina, struggling to balance the books, passed watered-down pension reform in 2017, which changes how pension and other social outlays are calculated. In terms of outlay, around 49% of Argentina's 2018 national budget corresponded to social security payments, which includes pensions. In 2017, the rate was 46%, and in 2003, before the previous administration set out its own reform in 2004, it accounted for 37.4% of the budget.

Countries including Chile and Mexico have defined contribution (DC) schemes, established to reduce future government liabilities - but could still come under pressure, Moody's said.

In these systems workers have an individual account and their pension size is not guaranteed but dependent on various factors, chiefly the investment performance of their pension savings.

"Indeed, in DC systems where benefits from individual accounts are low, resulting in inadequate pension income, there can be pressure on governments to provide supplementary pension benefits through non-contributory pensions or other social security programs, leading to higher government spending," Moody's said. "Mixed systems that combine a DB pillar and supplementary DC schemes face similar pressures."

Chile's DC system has come under fire for the small pensions many retirees receive and President Sebastián Piñera has a reform bill in congress designed to make improvements.

Colombia and Uruguay have mixed system, and calls have been made for reforms to ease pressure on state coffers. In Colombia, high economic informality has increased demand for non-contributory pension programs.

Last year the OECD called on member governments to ensure retirees receive an adequate income.

In Latin America, Chile and Mexico are OECD members. Colombia is poised to officially join the ranks of the OECD after congress in January approved the country's accession to the Paris-based forum.

"Pension reform remains a continuing challenge as countries need to ensure people get an adequate pension while remaining affordable," OECD secretary-general Angel Gurría said at the time. 

AGEING POPULATIONS

"Ageing populations and the increase in elderly dependency ratios will pressure most pension systems as the labor force shrinks and social security contributions drop," Moody's said. "At the same time, spending on pensions will increase as today's workforce reaches retirement age. As a result, pension-related deficits are likely to remain elevated over the medium term."

Uruguay, Chile, Costa Rica, Argentina and Brazil are the five nations forecast to have the highest elderly dependency ratios by 2030.

Moody's defines this as a ratio that captures the population outside the labor force aged 65 or older as a share of the working age population aged 15-64.

In its report, Moody's ranks 17 Latin American nations by forecast elderly dependency ratio by 2030. With 27%, Uruguay tops the list, while Guatemala has the lowest, 9%.

Brazil is expected to see the highest pension spending (as a % of GDP), of 17.1% in 2030, up from 8.5% in 2017. The forecast for Argentina is 8.3%, down from 9.7%. For Mexico spending on pensions is expected to be 2.3%, down from 3.2%.

The top five by highest forecast elderly dependency ratio by 2030

No. 1

Uruguay (mixed): 27% in 2030, up from 23% in 2020

No. 2

Chile (DC): 25% in 2030, up from 18% in 2020

No. 3

Costa Rica (mixed): 23% in 2030, up from 15% in 2020

No. 4

Argentina (DB): 20% in 2030, up from 18% in 2020

No. 5

Brazil (DB): 20% in 2030, up from 14% in 2020