World Bank official urges Uruguay to overhaul pension system

Uruguay needs to overhaul its pension system, according to a World Bank official.

Carlos Végh, the World Bank's chief economist for Latin America, said the country needs to implement structural reforms, local paper El País reported.

"I think that it's going to be relatively easier than, for example, a labor reform," he was quoted as saying.

Sector experts have suggested the country raise the minimum retirement age from 60, the paper said.

Uruguay's population is aging rapidly, according to an IMF report from December.

"Uruguay has one the highest proportions of elderly citizens in Latin America. Fourteen percent of the population is currently over 64 and this share is expected to increase to about 22% by 2050 and 31% by 2100, as fertility continues to decline and life expectancy increases," the report says.

"These demographic changes will directly affect long term fiscal sustainability by putting pressure on the pension system. The old-age dependency ratio, defined as the population aged 60 and above over the working-age population, is expected to grow from less than 33% in 2015 to 50% in 2050, and close to 77% in 2100. This increase will put pressure on the financial equilibrium of the pension system whose financing mostly relies on contributions or taxes paid by workers, while expenditures benefit elderly people."

Uruguay's pension system, one of the oldest in the region, was originally a pure pay-as-you-go (PAYG) system. Today it is mixed following reforms introduced in 1996. It has a defined-benefit component and an individually funded, defined-contribution component. It also has a noncontributory elderly and disability pension program.

Pension expenditures for the solidarity and PAYG pillars as a share of GDP are forecast to grow by about 30% by 2065, according to the IMF.

"Future reforms will need to address the growing fiscal expenditures required to maintain constant replacement rates," the report adds. "Increasing the retirement age to 65 could be an option to improve both fiscal sustainability and adequacy. The legal retirement age is still relatively low in Uruguay and typically well below that of advanced economies facing similar aging challenges."

Chile is a country that also faces longevity problems and presidential candidate Sebastián Piñera proposes encouraging, via financial incentives, workers to postpone their retirement.