Study shows lopsided pension benefits in Costa Rica’s public employee scheme

The top 9% of retirees in Costa Rica’s public employee pension scheme consume 200bn colones (US$330mn), or 26%, of its annual budget allocation, according to an analysis by daily La Nación. 

Drawing on annual expense reports and payroll data from November 2019 to July 2020, as well as data from the social security administration’s (CCSS) central collection system, La Nación published the investigative report Monday, showing that just 5,425 of the 60,900 pensioners received more than a quarter of the 762bn colones paid out.

The study focused on those retired public workers receiving more than 2.30mn colones a month, but of the 5,425 meeting that requirement, 66 received 5mn colones or more every month with the highest pensions close to 6.9mn.

In a 2020 analysis of Costa Rica’s pension system, the OECD offered praise for the system as being unusual in the region for its high coverage rate. But the system has also come under heavy criticism for inequalities that has triggered several attempts at reform. 

The legislature approved an initiative last year to cut pensions for over 4,000 retirees who received an average monthly pension of US$4,495, with some receiving more than US$24,000 per month. The initiative was popularly called Ticos Con Coronas (Costa Ricans with crowns).

The OECD is one of several bodies recognizing that the contributory system does not generate enough resources to be sustainable in the medium term, and it will have to undergo a more profound overhaul to achieve better fairness and be sustainable.

As shown in the following OECD graphic, given the current demographic trends, a recent actuarial study shows that the system will run operational deficits in about 10 years and the reserves will be depleted in 15 to 20 years.

Source OECD

Public expenditures on pensions are projected to reach 9% of GDP by 2050, placing Costa Rica close to the OECD average. The gap between pension expenditures and revenues will have to be financed by the reserve fund as of 2030 and, once the reserve fund is depleted in 2037, by the central government budget.

The Costa Rican pension system comprises four pillars: 1) a contributory defined benefit scheme, often referred to as the IVM scheme; 2) a non-contributory regime paying a minimum pension (below the poverty line), which is financed from the government budget; 3) a compulsory defined-contribution scheme; and 4) a voluntary defined-contribution scheme. 

In addition, there are special regimes for some public employees, such as those in the judiciary, and these were the subject of La Nación’s study.

The outlet found that 7,735 former public employees receive pensions that are larger than the cap of 1.7mn colones that has been placed on the IVM scheme.

The majority of Costa Rica’s retirees, 64%, have a monthly pension of less than 1mn colones and of that percentage, half receive less than 500,000 colones.