Debate ramps up over pension reform in Dominican Republic

Politicians and economists from the Dominican Republic are joining in the debate over President Danilo Medina's proposed overhaul of the social security system, including pension reforms.

On Tuesday, center-left Alianza Pais lawmaker Fidelio Despradel warned the legislation is more focused on boosting profits at the nation's private pension fund managers (AFPs) rather than fulfilling the needs of workers.

In a letter to fellow legislators, Despradel said that under the proposal, commissions at AFPs would reach 8.17bn (US$161mn) pesos this yaer. He also cited studies by the Juan Bosch Foundation saying net income at AFPs would grow at an annual rate of 14.3%, climbing to 35.52bn by 2030.

"This is happening at a moment in the world that demonstrates the failure of the model of pensions based on individual capitalization in every country on the American continent, proposed as improving contribution levels without affecting financial sustainability," wrote Despradel, adding that actuarial studies show AFP affiliates are likely to receive only around 25% of their final salary as pension upon retirement.

In proposing the reforms, Medina has aimed to significantly reduce AFP commissions, making changes that would consolidate two commissions linked to investment yields that combined can reach 30% into a single account balance-based commission of 1.4%.

As presented by Medina, it would also eliminate penalties and late fees on contributions, help MSMEs catch up on payments; re-establish affiliation for an estimated 150,000 workers, and strengthen the financial and legal framework of the pension system.

According to pension regulator SIPEN, the nation's seven AFPs had some 3.73mn affiliates at the end of February, up 6.3% year-on-year.

Assets under management at the AFPs amounted to 485bn pesos at the end of February, and the agency reported an average profitability of 8% in nominal terms for the month, down from 11.4% a year before.

Economist Ernesto Selman, executive vice president of sustainable economics think tank CREES, has voiced his opposition to the current proposal and in particular with the establishment of a pay-as-you-go system, considering it as failed in the countries where it is applied, including the US, Costa Rica, Uruguay, Italy, France and Holland.

Speaking in televised interviews and open forums, Selman has recommended making changes and reforms in the economy to expand pension coverage in an attempt to boost replacement rates. He concluded that the problem is not the pension system but the economic and social policies of the state.

He argues the reforms fail to properly address key problems that impact the social security system: high unemployment, high labor informality and widespread understatement of taxable income.

"If you are unemployed or in informal [employment], you are not contributing to an individual workers account, and this creates a major problem, and then there is another issue that needs to be seen, that is the income level of Dominicans and what they are actually declaring, where there is a great deal of understating and even fraud that does occur," said Selman in an TV interview with Noticias Sin.