Analysis of the Brazilian pension system:
Should Brazil reform its pension system according to the Chilean pension model?
ERASMUS UNIVERSITY ROTTERDAM
Department of Economics
August 2009
Supervisor: S.G. van der Lecq
Name: Johanna van Tol
Exam number: 302692
E-mail address: 302692jt@student.eur.nl
Abstract:
During the last couple of decades various countries have reformed their pension system. Particularly
Latin America has been the platform of many pension reforms during the 1980s and 1990s. Chile
pioneered in making a radical change from a publicly managed Pay-As-You-Go (PAYG) system to a
privatized fully funded system and it was then followed by numerous neighboring countries.
However, Brazil took a different approach as it kept its PAYG system. Currently Brazil faces several
threats and challenges for the sustainability of the pension system. Examples are the ageing of the
society, too generous benefits that are paid to the public workers and the increasing income
inequalities. These threats and challenges lead to the question how Brazil can change its pension
system in such a way that allows them to cope with problems and enhance the sustainability of the
system. This paper analyses the several options a country can choose to design its pension system
and lists of each the advantages and disadvantages. Subsequently it takes a closer look at the current
system in Chile and the negative and positive effects of that reform. The paper continues with an
examination of the problems in the Brazilian pension system. Combining the (dis)advantages of the
pension design options and the characteristics of Brazil the paper finds that it would be in Brazil’s
best interest to reform its system into a fully funded system like Chile. Additionally, the paper gives
several recommendations on how the reform should be implemented in Brazil. The paper finishes
with suggestions for further research that relate to the winners and losers of the reform and the
transition and administration costs.
Keywords: pension reform, Brazil, Chile, pension system, ageing
Table of contents
1. Introduction
4
2. Why do pension systems exist?
2.1 What is a pension?
2.2 Functions of a pension system
2.3 Subsidiary objectives for pensions
5
5
6
7
3. Overview of different types of pension systems
3.1 Three pillar design
3.1.1 First pillar
3.1.2 Second pillar
3.1.3 Third pillar
3.2 Pay-As-You-Go system
3.3 Fully funded
3.3.1 Defined contribution (DC) plans
3.3.2 Defined benefit (DB) plans
3.3.3 Hybrid schemes
8
8
9
10
11
11
12
12
13
13
4. Advantages and disadvantages of different pension plan designs
4.1 Options to structure pension systems
4.1.1 Voluntary or mandatory contributions?
4.1.2 Publicly or privately managed pension system?
4.1.3 Fully funded or PAYG?
4.1.4 Defined benefit (DB) or defined contribution (DC) plan?
4.2 Remarks on designing pension plans
14
14
14
16
18
20
21
5. The pension system in Chile
5.1 Historical overview
5.2 Overview of current pension system in Chile
5.2.1 First pillar
5.2.2 Second pillar
5.2.3 Third pillar
5.3 Other features of the reform
5.3.1 Gradual transition
5.3.2 The role of the government
5.3.3 AFPs
5.4 Results of the pension reform
5.4.1 Positive effects of the reform
5.4.2 Negative effects of the reform and future challenges
22
22
23
24
24
25
25
25
26
26
27
27
29
6. The pension system in Brazil
6.1 Historical overview
6.1.1 The origin of the Brazilian pension system
6.1.2 1988 Constitution
6.2 Overview of the current pension system in Brazil
6.2.1 Zero pillar
6.2.2 First pillar
6.2.3 Second pillar
6.2.4 Third pillar
32
32
32
33
35
36
37
38
38
Page | 2
1
6.3 Challenges ahead
38
6.3.1 Ageing of the society
39
6.3.2 Too generous benefits for public workers compared to benefits for private workers 42
6.3.3 Disparities in the retirement age and contribution time between men and women 43
6.3.4 Income inequalities and poverty
44
6.3.5 Informality
44
Page | 3
1
7. Comparing the Brazilian and Chilean pension models
7.1 Comparable pension system problems
7.1.1 Demographic situation
7.1.2 Economic situation
7.1.3 Political situation
7.1.4 Government budget situation
7.1.5 Problems in pension systems
7.2 Analysis of the options to structure the pension system
7.2.1 Structure choices made in Chile and Brazil
7.2.2 How should Brazil structure its pension system?
7.3 Policy recommendations
7.4 Winners and losers
46
46
46
47
48
48
48
48
49
49
51
52
8. Conclusion
53
9. Reference list
55
1. Introduction
During the last couple of decades various countries, both developed and developing, have reformed
their pension system. Possible motives for these reforms have been demographic developments (e.g.
rising life expectancies and falling fertility rates), transitions in the labor market (e.g. increasing
informality) or (increasing) deficits on the pension balance. Particularly Latin America has been the
platform of many pension reforms during the 1980s and 1990s. Chile pioneered in making a radical
change from a publicly managed Pay-As-You-Go (PAYG) system to a privatized fully funded system
and was then followed by numerous neighboring countries. In total 11 Latin American countries took
the Chilean model as an example for reforming their own pension system, but Brazil took a different
approach. Brazil found the political and economic implications of the reform insurmountable because
of fiscal constraints. Therefore, Brazilian government decided to focus on strengthening their public
PAYG system.
Currently Brazil faces several threats and challenges for the sustainability of the pension system.
Examples are the ageing of the society due to rising life expectancies and falling fertility rates (United
Nations 2008), too generous benefits that are paid to the public workers leading to large budget
deficits (Ferreira Savoia 2007) and the increasing income inequalities (Besley and Burgess 2003).
These threats and challenges lead to raising the question how Brazil can change its pension system
that allows them to cope with problems and enhance the sustainability of the system. Is it advisable
that Brazil also follows the other 19 countries worldwide that have transformed their pension system
in accordance with the Chilean model? Or should the current PAYG system be adjusted in such a way
that it can handle the problems? These questions lead to the main research question of this paper:
‘Should Brazil reform its pension system to the Chilean pension model?’
Previous literature has concentrated on analyzing the Chilean reform and describing the current
Brazilian pension situation and the main challenges it faces. For example, Schmidt-Hebbel (1995) and
Mesa-Lago (2003) assessed the Chilean reform benefits from a macroeconomic and growth
perspective and outlined the accomplishments and weaknesses. Pinheiro (2004) and Medici (2004)
described the historical overview of the Brazilian pensions system, explained why the Brazilian
government did not reform the pension system like the other Latin American countries and how the
current system operates. In addition, Bonturi (2002) and Ferreira Savoia (2007) identified five critical
matters of concern for the sustainability of the current Brazil pension system. However, none of the
literature gave clear suggestions on how the current problems in Brazil can be solved. No research
Page | 4
1
assessed whether in particular the Chilean model would be a suitable alternative, as it has proved to
be a success in other Latin American countries (Roncada 2000).
This paper first takes a look at the different options to design a pension system in general. Pension
designers have the choices of having a mandatory or voluntary system, a publicly or privately
managed system, a PAYG or fully funded system and finally Defined Benefit (DB) or Defined
Contribution (DC) schemes. For each of the choices the advantages and disadvantages of the options
are explained. Additionally, the current pension situation of Brazil and the Chilean reform is
described. By combining the analyses of the pro’s and cons of the various options for structuring a
pension system in general and the Brazilian characteristics in specific, the most suitable pension
design for Brazil can be identified. The paper finds that this most optimal design for Brazil resembles
the features of the Chilean pension system. However, before examining whether the Chilean pension
model should actually be implemented in Brazil, it is important to ensure that the two countries face
the same pension problem. After concluding that Brazil and Chile are quite similar in terms of their
demographic, economic and fiscal situation, the paper gives several policy recommendations on how
the Chilean model should be implemented in Brazil. Furthermore, it highlights the lessons Brazil can
learn for Chile and eventually how the sustainability of the Brazilian pension system can be
improved.
In section 2 the existence of pension systems in general is explained, followed by an overview of the
different types of pension systems in section 3. Section 4 continues with the advantages and
disadvantages of the different types that were described in the previous section. Sections 5 and 6
outline the pension situation in Chile and Brazil, respectively. Subsequently, section 7 makes a
comparison between the two countries and answers the research question, whereas section 8
concludes.
2. Why do pension systems exist?
This section starts by giving a definition of pension, continued by the three main functions of a
pension system. Furthermore, secondary functions of pensions are presented, which should be given
the appropriate priority as they can undermine the original functioning of pensions.
2.1
What is a pension?
Page | 5
1
The concept of pensions is used to indicate different types of benefit payments. To define a pension,
this paper uses the definition given by the World Bank. The World Bank (1994) defines a pension as:
‘Old age, retirement, survivors’, death, and invalidity-disability payments based on past contribution
records plus noncontributory, flat universal, or means-tested programs specifically targeting the old.’
Page | 6
1
2.2
Functions of a pension system
In designing a pension and social insurance system, particular emphasis is placed on balancing the
functions of consumption smoothing, insurance and redistribution. Disparities in pension design are
the result of differences in the level of solidarity and policy priorities between countries.
The first key function of a pension system is to facilitate individuals to smooth their consumption
over their lifetime. Over an individual’s life course his or her income varies substantially. This
particularly holds for individuals who are mainly dependant on wages as means of income.
Consequently, it necessitates for shielding an individual’s consumption from part of these
fluctuations in income. If an individual saves a part of his or her income during his or her working life,
then after retirement these accumulated savings can be used to provide an adequate income. In
Figure 2.1 and Figure 2.2, the consumption smoothing with two scenarios is graphically illustrated.
Even in the event of uncertainty in terms of labor market, economic crises and cuts in social
programs, consumption can still be partially shielded from fluctuations.
Figure 2.1 Consumption smoothing
Figure 2.2 Consumption smoothing
without uncertainty
with uncertainty
Source: Barrientos (2002)
Source: Barrientos (2002)
Secondly, a pension plan operates as an insurance against several unforeseen events or risks which
could have an adverse effect on household consumption. It mainly protects against the longevity risk
which is defined as the possibility that people could outlive their accumulated savings. With rising life
expectancies across the world (UN 2007), this possibility becomes more likely if the benefit formula is
not adjusted accordingly. On the other hand, a pension plan insures against early deaths as well. In
case of the (premature) death of the breadwinner, benefits will be paid to the dependent survivors.
Moreover, factors influencing the length of the working life, for instance unemployment and
disability, can be minimized. Lastly, via indexed pension benefits pension plans also limit the inflation
risk.
Thirdly, pension plans can serve a redistributive function, if contributions paid by workers are used to
pay the benefits of the elderly. Besides redistributing income across generations, by for instance
passing on income from individuals who work to people who are old, pension plans can also
redistribute income within generations. This can be accomplished by, for example, a redistribution
that favors the benefits paid to women or poorer elderly. Another, perhaps more obvious, example
are the benefits paid to the disabled.
These three functions together attribute to the main objective of a pension system, which is to
assure an adequate standard of living for elderly to the highest level possible. Adequacy can be
classified into three categories; relative, absolute and, partly relative and partly absolute. Relative
adequacy means that the retirement benefit is adequate relative to the individual’s previous
standard of living. Absolute adequacy, on the other hand, refers to a retirement benefit that results
in a pension income high enough to afford a pre-specified absolute level of living. (e.g. to the
nationwide poverty line) The last possibility focuses on providing a higher benefit per dollar
contributed to people who have lower incomes. In designing a retirement system a country can
choose which type of adequacy it wants to fulfill and adjust its plan accordingly.
2.3
Subsidiary objectives for pensions
It is often found that pension systems also carry other responsibilities in addition to the previously
described objective. Examples in Latin America can be found where the pension reforms are also
intended to deepen the capital market or to stimulate the country’s economic growth. However,
caution is in order as subsidiary motives can cause problems that undercut the original functioning of
pensions. Additionally, these secondary objectives should not become more important than the
fundamental objective, as they could undermine rather than improve retirement income security.
Page | 7
1
3. Overview of different types of pension systems
This section will outline the general design of a pension plan, with the frequently used three pillars
system. Each pillar serves a particular function and is managed differently. The main characteristics
of each pillar are listed and elaboration is given on funding each particular pension pillar.
3.1
Three pillar design
Pension plan features vary considerable among countries in, for instance, who has to pay pension
contributions. Another issue is who receives pension benefits. Lastly, the relationship between
benefits and contributions shows variances in the degree of linkage across the world. However, a
general picture of a pension system design can be drawn as in the majority of countries the system
consists of three pillars or parts of it (World Bank 1994). This construction can simply be described as;
‘Do not keep all of your eggs in one basket’. Specifically for a pension system design, it refers to the
three pillars that are exposed to various risks and the correlation among these risks is considerably
lower than 100 per cent. Consequently, a pension system that is built upon multiple pillars will profit
from security through diversification (Rutkowski 2002). The most effective size and combination of
pillars varies over time and place. This combination is partially path dependant and influenced by the
nation’s pension objective and current situation. Moreover, the extent to which the financial markets
are developed, the sophistication of the regulatory system and the government’s taxing ability
should also be taken into account in determining the right size and combination of pillars.
In its 1994 research report on averting the old age crisis, referring to the threatening combination of
increased life expectancies and falling fertility rates across the world, the World Bank concluded with
the recommendation that a nation’s pension plan should perform all three earlier mentioned
functions. In particular, the World Bank emphasized the importance and usefulness of a multipillar
system. The World Bank (1994) argues that such a system will assist a country in several ways; this
type of pension design is most likely to foster economic growth, is able to offer adequate pension
benefits and the diversification lowers the risk.
Figure 3.1 outlines the main characteristics of each pillar, as it lists the respective type of pension it
is, whether participation is mandatory, and how it is financed, disbursed and managed. There is not
one simple format for designing a pension plan that is applicable everywhere, since countries vary in
their social, legal and economic situation. Nevertheless, the three-pillar model can be taken as a
starting point in the design process and adjusted to fit the country’s characteristics. The major
objectives of the pension system are separated into the three pillars, each having its own source of
Page | 8
1
funding. The first pillar offers a social safety net to everyone meeting the eligibility requirements
(redistribution and insurance), the second pillar emphasizes on savings (consumption smoothing) and
finally the third pillar tries to boost discretionary savings and serves the self-employed as they do not
have a second pillar. As the core of this paper will discuss the differences in pension designs in Brazil
and Chile, it is of importance to briefly explain each pillar and the various features. Section 4 will
continue with the implications and (dis)advantages of each type of pension plan, before analyzing the
situations in the two countries.
Figure 3.1 Characteristics of a three pillar pension system
Source: World Bank (1994), and Blake (2006)
3.1.1
First pillar
The first pillar is a basic state pension offered by the government as a share of the social security
system. It is undoubtedly the largest and most redistributive pillar in many countries (World Bank
1994). Most commonly it is a flat-rate pension (means-tested or earnings-related is also possible) for
anyone above a specified age and this pillar is intended to help the elderly with at least their basic
needs. Two main types of social security system exist; the Beveridgean and Bismarckian. Examples of
the Beveridgean system can be found in the UK and USA, where it offers just sufficient support to
keep people above the poverty line. The Bismarckian system (e.g. in Italy, France and Germany), on
the other hand, is more generous in providing support as it barely requires any supplementary
planning. This subsistence pension is usually financed by taxation that is part of the social security
Page | 9
1
tax that governments raise. The system is generally unfunded as benefits received from taxpayers are
immediately paid to the elderly via a Pay-As-You-Go system (PAYG system), which will be explained
in the next part of this section. No matter whether a person has worked and contributed to the
system or not, everyone is eligible for this type of pension if he or she is above the retirement age.
This pillar is redistributive in the sense that transfers are made from the taxpayers to the elderly.
3.1.2
Second pillar
The second pillar involves the occupational pensions. This pension is a form of compensation for
deferred income through forced savings. Pensions in this pillar consist of the contributions made by
employer and employee and are being accumulated by the pension fund. Parts of the employee’s
earnings will be contributed to the pension fund and will be paid out once the employee retires. The
direct linkage between contributions and benefits is a vital mechanism in this pillar. The link
discourages tax evasion and encourages active participation of the labor force. Rutkowski (2002)
argues that if employees realize that their contributions are not a tax, but will be used to pay out
their benefits during retirement, they will be less resistant to work in the formal sector. Stating it
differently; if employees refrain from paying the legally mandated contributions by, for instance,
retiring early or working in the informal sector, they will receive lower pension benefits when they
retire. To prevent low pension benefits, employees will be more inclined to participate in the
occupational pension plan.
Even though nearly all occupational pension schemes are funded, there is significant variation
between the different types of scheme; defined benefit (DB), defined contribution (DC) and hybrid.
An elaboration on these types of schemes can be found in section 3.3.
The redistributive function of occupational pensions might not be as easily observable as for the
basic state pensions, but it does exist. For example, Gustman and Steinmeir (1990) found that if
employers pay high wages, they tend to offer pensions more often than employers who pay low
wages. In case that the employees of these high paying employers receive both higher wages and
higher pensions than similar employees (in terms of productivity) working at other companies, then
the total income distribution is tilted via pensions. In this situation it is assumed that the total income
consists of a wage and nonwage element (e.g. pensions). Furthermore, pension contributions and
investment income earned through the pension fund are in many countries tax deductible (World
Bank 1994). The government can offset the resulting lower tax revenue via higher tax rates or
providing fewer services. Thus the participants impose a cost on the taxpayers.
Page | 10
1
3.1.3
Third pillar
Lastly, there is the third pillar which predominantly contains voluntary personal savings that are
privately managed via defined contribution systems. The benefits that are eventually received by the
workers depend on their contributions, return on investment and expected longevity. Another
possibility is life insurances. This pillar is available to anyone who is interested in supplementing his
or her retirement income that is yielded by the first two pillars.
It is possible that there exist shortfalls or holes in pensions, which can emerge due to changes in
employment, residence abroad or by non-participation to the labor force. Moreover, the selfemployed do not have a second pillar and depend more heavily on the third pillar for accumulation
of their pension. Governments who realize the existence of potential shortfalls in the funding of
pension savings can become actively engaged in resolving this problem. A proposed solution is
providing incentives for voluntary savings for pillar three via favorable tax treatment. Another
possibility is to increase the rate of mandatory contributions to the second pillar, if the shortfalls
arise due to changes in employment.
3.2
Pay-As-You-Go system
As mentioned before, the focus of this paper will be on the differences in pension design between
Brazil and Chile. Since the two countries take different approaches to fund their old age security plan,
it urges for more elaboration on these approaches; fully funded and unfunded (PAYG).
The PAYG system in its most basic format is essentially welfare payments to the elderly, which are
financed by taxation. This type is mainly used in the first pillar to serve as a guaranteed minimum
income for the elderly. The state levies a mandatory tax on income, most often on wages, of the
working population. The revenues are not saved, but rather used instantly for pension benefit of the
elderly at that time; hence the name pay-as-you-go. Thus, today’s taxpayers pay pensions to today’s
elderly, while expecting that their pensions will be financed by future taxpayers.
The benefits received by the current elderly will determine the amount of payroll tax payments by
the current taxpayers. Taking it in its simplest form, the factors influencing the payroll tax rate Trate
are the benefit rate Brate (average benefit/average wage) and the dependency ratio Dratio
(beneficiaries/ covered employees). Thus, resulting in the equation:
(1.)
Page | 11
1
However, it is important to note that influential factors such as administrative costs, unemployment,
early retirement, survivors’ benefits and tax evasion are omitted (World Bank 1994).
The PAYG process serves as redistribution of real income, both across and within generations. In
addition, the responsibilities of mandating, financing, managing and insuring the plan are placed on
the government.
3.3
Fully funded
This type of funding is particularly used for the second and third pillar. A fully funded system is
defined as a scheme in which a stock of capital is accumulated to pay out benefits in the future. The
aggregation of contributions combined with investment returns should be sufficiently high at any
time, to cover the present value of the complete stream of future payouts. Stating it differently; a
person is responsible for accumulating enough money to support him or her during old age, which
for instance could be realized via contributions to pension funds.
3.3.1
Defined contribution (DC) plans
By definition defined contribution plans are fully funded, for the reason that participants are only
entitled to the earnings of their own individual accounts. While participants are working, the
employer will make contributions, which are usually based on a percentage of the employee’s wage,
on their behalf to their individual account. These payments are directly linked with the benefits that
will be received upon retirement. The contributions are invested, generally by professionals, to earn
a return. Depending on how well these funds are managed, the individual account will accumulate
over time. In case more contributions are made (under the condition that this is allowed), the benefit
received by the retiree upon retirement will consequently also rise. Therefore, workers with higher
wages will generally contribute more to the fund and will ultimately have higher retirement
accumulations than workers with lower wages (ceteris paribus).
As the benefits are directly linked to contributions, this scheme usually does not guarantee a
minimum benefit, consequently it means that the employee bears the investment risk. Moreover,
defined contribution systems can redistribute but to a lesser extent compared to defined benefit
systems. Reason for this is that no redistribution takes place between generations, which happens in
defined benefit plans as the current employees pay the benefits of the current elderly. However, in a
defined contribution plan consumption of a participant will be redistributed from his or her working
life to retirement (Blake et al., 2008).
Page | 12
1
Once a participant retires the DC benefits can be paid in two forms. On the one hand, the
accumulated contributions can be paid as annuities, in which the person is guaranteed a steady
stream of pension payments until his or her death. On the other hand, the elderly could be paid a
lump sum of all of their accumulations and another option is that one part of the accumulations is
paid in lump sum and the remaining part as annuities.
3.3.2
Defined benefit (DB) plans
Another type of pension arrangement is defined benefit plans, which can both be funded and
unfunded. In principle the employees are entitled to a peculiar level of benefit that in general is
based on the age, wages and length of service of the employee. For instance, a widespread used DB
pension benefit formula would explain a pensioner’s annuity benefit A as a function of his or her
retirement age R, a basic benefit amount B, a wage linked factor depending on the employee’s final
wage or average wage during career FW, his or her years of service at the employer YS and lastly a
generosity factor g. In the private sector this factor is most often approximately 1 per cent (g=1.01)
and on average a higher factor is applied in the public sector (Kaufman, 1998). Taken together the
following formula arises (Mitchell et al., 1996):
(2.)
The employer needs to make current contributions, based on actuarial calculations, to the pension
fund to ensure that there is enough money available to pay the future promised pre-set benefits.
There are numerous assumptions on which the actuarial calculations are based, such as retirement
benefits, life expectancy and the return on investments. The employer bears the investment risk and
the portfolio management for defined benefit plans.
3.3.3
Hybrid schemes
Hybrid pension plans are a mixture of DC and DB plans. A couple of examples of the most found
hybrid plans are (Blake, 2006);
-
Sequential hybrid scheme. A DC component is imposed for people below a certain age and a
DB component is used for people above it. The benefit of this mix is that is offers portability
possibilities for younger employees, who usually are more mobile and more stable pensions
for older employees.
-
Combination hybrid scheme. In this combination a DB pension is applied for salaries up to a
certain limit and a DC pension for salaries above this limit.
Page | 13
1
-
Targeted benefit scheme. Although it is a DC scheme, it aims to provide a targeted pension.
Thus if the pension fund falls short or exceeds the target, the contributions need to be
adjusted.
Page | 14
1
4. Advantages and disadvantages of different pension plan designs
The following section will explain advantages and disadvantages of voluntary and mandatory pension
plans, of privately and publicly managed plans, of funded and PAYG plans and of DB and DC plans.
Furthermore, it highlights another few important features for designing a pension plan.
4.1
Options to structure pension systems
In designing a pension plan there are four essential questions that determine the structure of the
pension plan (World Bank 1994). The first question is; should the pension plan be voluntary or
mandatory? The second question is whether the plan should be managed publicly or privately,
followed by the third question, whether the plan should be funded or unfunded (PAYG). The fourth
question relates to how pension benefits are financed; either via a DB-plan or via a DC-plan. This part
lists the advantages and disadvantages of each choice for the four questions. At the end of each subsection a small summary of the advantages and disadvantages is presented, which will be used to
evaluate the choices made by the Brazilian government.
4.1.1
Voluntary or mandatory contributions?
In the majority of the countries the contributions to the third pillar of the personal saving plans are
voluntary, whereas the first pillar with the subsistence pension requires mandatory contributions.
For the second pillar of the occupational pension plans, countries are less unanimous. Both voluntary
and mandatory plans are widely used (World Bank 1994).
An advantage of having pension plans with mandatory contributions is that it prevents individuals
from making insufficient contributions, resulting in a lower standard of living after retirement
(Katona 1964, and Cagan 1965). Reasons for insufficient savings are, for instance, that individuals can
be too myopic; particularly young employees are not concerned about accumulating a pension
(Poterba 1994). Individuals do not attach enough weight to pension utility in their lifetime utility
function (Feldstein 1985). Prove for myopic behavior was found by Katona (1964), who concluded
that only when the realization date of an event approaches, individuals will pay more attention to it,
however by that time it could be too late. Moreover, Cagan (1965) suggested that a mandatory
pension system, which forces individuals to participate, will make individuals acknowledge the
usefulness of providing for retirement. Besides myopia, there could be self-control problems that
prevent individuals from making adequate contributions to their pension fund (Poterba 1994). Even
people with the right intentions sometimes have problems with self-control, which consequently
1
leads to insufficient saving for retirement (Thaler 1994). Thus, all of these problems could be present Page | 15
with voluntary contributions, but in the case of mandatory contributions they are ruled out.
An associated problem occurs in case a country has an anti-poverty program, and the contributions
to the pension system are voluntary. It gives workers the option to dissave during their entire
working life and depend on the noncontributory pension system when they are old (Hubbard et al.
1994). This problem could be resolved if a minimum level of contribution is enforced.
On the other hand, an advantage of voluntary contributions is that it requires less extensive
involvement of the government and less regulations. On the contrary, mandatory pension plans do
require extensive involvement of the government. Not only does the latter option incur higher
administrative costs for keeping track of all the contributions, mandatory pension plans also need
further specified legislation (World Bank 1994). Once the new legislation has been approved, it also
needs to be enforced. The enforcement can be costly as well, as mandatory pension plans are
vulnerable to evasion of pension contributions (Mitchell et al. 1996). The World Bank (1994) argues
that especially developing countries face problems with the administration of mandatory
contributions and enforcement of new legislation, due to a poorer functioning of the government.
Table 4.1 summarizes the advantages and disadvantages of making contributions voluntary or
mandatory.
Table 4.1 Advantages and disadvantages of voluntary and mandatory contributions
Voluntary
Advantage
Disadvantage
* Less extensive involvement of
* Due to myopia and self control
the government and less
problems, individuals might not
regulations
make adequate contributions
* Individuals can dissave all their
life and then rely on
noncontributory anti-poverty plan
Mandatory
* Prevents individuals from making
* Requires extra government
insufficient contributions
regulation and enforcement
* Individuals cannot dissave all
their life and then rely on
noncontributory anti-poverty plan
Source: Author
4.1.2
Publicly or privately managed pension system?
The choice between a publicly and a privately managed pension system is essential as the investment
outcomes can be significantly different with these two options. On the one hand, there are the public
managers chosen by politicians and on the other hand, there are the private managers chosen by the
individuals. In this paper the issue of having a publicly or privately managed pension system is
addressed as by who is responsible for appointing the pension managers; the government or the
private sector (e.g. employees, employers or self-employed). The government will chose pension
fund managers for the entire country, while the private sector is more individually based. The
pension managers chosen by the latter group operate in a more competitive environment and face
different constraints and incentives than the managers chosen by the firstly mentioned group.
If a pension system is publicly managed, governments commonly require that the pension funds are
invested in government bonds or government related projects, which often results in below-market
rates of return (World Bank 1994). Reasons for the government interference are, for example, to
finance the government’s budget and to prevent pension funds from having too large an influence
over the private economy (Thompson 2001). The low returns that are generated could even become
negative in real terms if they are corrected for inflation. Iglesias and Palacios (2000) found that the
pension funds could have earned more on the open market compared to investing in government
bonds, which had an adverse effect on the individuals via either higher contribution rates or lower
benefits.
Page | 16
1
On the contrary, if a pension system is privately managed the private sector chooses the fund
managers. The private sector will usually not accept below-market returns. However, it can be
questioned whether they are aware of projects that yield below-market returns, because some
individuals might lack the relevant knowledge. The private pension managers have to compete with
one and another, by offering higher rates of return on contributions or better service to attract more
clients. The incentives for cost efficiency are higher compared to the situation of publicly managed
systems (Yadav 2004). Furthermore, since privately managed pension managers usually face fewer
government intrusions that limit the investment options, they can better allocate the capital to
investment projects that offer the best risk-return combinations. Additionally, private management
profits from the possibility to invest in internationally diversified portfolios and gaining international
managerial expertise, which is generally limited for public management (World Bank 1994).
Privately managed pension plans, however, tend to be more subjected to marketing costs than
publicly managed plans. The higher marketing costs result from trying to acquire more clients in a
competitive environment. As a result, it leads to higher administrative charges that will offset the
gains of cost efficiency obtained via competition. Additionally, privately managed pension plans
benefit less from economies of scale, since individuals and their contributions are more divided over
the numerous pension funds. Another disadvantage of privately managed pension plans is that it
requires careful regulation, to prevent investments in projects that are excessively risky.
Both publicly and privately managed pension plans face the potential threat of fraud and
malfeasance. An attempt to keep this at its minimum is implementing further regulations. However,
if the problem of fraud lies within the governmental system itself (e.g. government corruption), it is
an obstacle that is very hard to overcome. In addition, the risk of nationalization exists, with
Argentina in 2008 as an example.
Table 4.2 summarizes the advantages and disadvantages of having a publicly or privately managed
pension system.
Page | 17
1
Table 4.2 Advantage and disadvantages of publicly and privately managed pension systems
Public
Advantage
Disadvantage
* Less marketing costs
* Often required to invest in
* Benefits from economies of scale
below-market yielding government
bonds
* Poorer service
* Less incentives for cost efficiency
Private
* No government interference
* Higher marketing costs
* Higher rates of return
* Less benefits from economies of
* Better service
scale
* Incentives for cost efficiency
* Benefit from investing in
internationally diversified
portfolios
Both
* Threat of fraud and malfeasance
* Risk of nationalization
Source: Author
4.1.3
Fully funded or PAYG?
In the early stages of pension systems, when the dependency rate was low due limited eligible
beneficiaries, PAYG always appeared cheaper than fully funded plans (Gent 2001). Nowadays, the
PAYG system matures and more individuals become eligible for benefits, which fades away the
advantage. Only in the case of an earnings growth rate combined with the labor force growth rate
that is higher than the interest rate, Samuelson (1958) and Aaron (1966) argue that PAYG can
continue to have a cost advantage or higher rate of return in the long run. It means that the
contributors will receive benefits amounting to an equal or higher present value than they paid in as
contributions. If this holds, PAYG is Pareto efficient since it makes all generations better off.
However, if the earnings growth rate and labor force growth rate together are less than the interest
rate, then a fully funded system has a long term cost advantage or a higher rate of return.
Currently, many countries are challenged by trends of increased life expectancy and falling fertility
rates (UN 2007). Especially the latter causes most concern, since it reduces the base of the
population pyramid. The PAYG systems in the 20th century could be described as ‘Ponzi schemes’
(Turner 2006) in the sense that they require that there are more contributors in each next link of the
chain, in order to keep the relationship between collected contributions and paid benefits viable. The
earlier mentioned demographic challenges can break the chain, if they are not off-set by productivity
Page | 18
1
gains. Otherwise the respective countries should make any of the three following adjustments to
prevent the break-up. The first option is to increase the levels of tax or mandatory contributions.
Secondly, the pension benefits could be lowered or lastly, the retirement age must be increased.
These adjustments, however, can create a sequence of effects that could again negatively affect the
1
sustainability of the PAYG system. If more wealth is transferred from the young to the old, the young Page | 19
will ask for more benefits in the future in return. This wealth transfer will again initiate another series
of transfers from future to current generations and so on.
Moreover, assuming there is no direct link between the currently paid contributions and the future
received benefits with the PAYG system, individuals have an incentive to evade the system (if this is
possible) and this could lead to labour supply distortions. On the contrary, fully funded systems are
better able to cope with the demographic changes and incentives for evasion of contributions, since
there is a direct link between contributions and benefits.
The downside of fully funded systems is, for instance, that they are more vulnerable to the
investment risk. Due to poor investment performance, the amount of benefits might be inadequate
to maintain the same standard of living (Bodie 1990 and Diamond 1997). Furthermore, some
societies find it desirable to have a redistributive function both inter- and intragenerational in the
pension system (World Bank 1994). Fully funded systems perform this function to a lesser extent
than PAYG systems.
Table 4.3 gives an overview of the several pro’s and con’s of fully funded and PAYG systems.
Table 4.3 Advantage and disadvantages of fully funded and PAYG pension systems
Fully funded
Advantage
Disadvantage
* If earnings growth rate and labor
* Investment risk
force growth rate combined are
* Lower redistributive functioning
Page | 20
1
lower than the interest rate, it will
have a higher rate of return
* Able to handle increased life
expectancy and falling fertility
rates
* No incentive to evade the system
PAYG
* If earnings growth rate and labor
* Difficult to cope with increased
force growth rate combined are
life expectancy and falling fertility
higher than the interest rate, it will
rates
have a higher rate of return
* Incentive to evade the system
* Higher redistributive functioning
Source: Author
4.1.4
Defined Benefit (DB) or Defined Contribution (DC) plan?
The last major question relates to defining how benefits and contributions are calculated, either via a
DB plan or a DC plan. There are quite some differences between these two types of plans. DC plans in
the second pillar have the benefit that they are less exposed to the employer solvency risk,
portability risk and can more easily be vested than DB plans (Bodie 1990 and Diamond 1997). In DB
plans, the employer bears the investment risk, because he or she is responsible for providing the predefined benefit if the employee retires. However, it could happen that the employer chose the wrong
investment opportunities leading to insolvency and the inability to pay out the benefits. A portability
loss arises if an employee switches jobs, because DB plans are usually provided by a particular
employer and if an employee changes to another job he or she will have to move to a new
employer’s scheme. Furthermore, there are countries where the actuarial formula used to calculate
the defined benefit favors employees who have been in service for a longer time (Mitchell et al.
1996).
On the other hand, DC plans are more exposed to investment, disability and longevity risk. There
exists uncertainty on how well the investment is managed; if it yields the promised rate of return and
how long individuals will contribute and collect. The risk of disability can be covered if an individual
buys disability insurance and the longevity risk can be minimized if an annuity is bought from an
insurance company. It is more difficult to shield the individual from the investment risk. It is true that
DC plans do not guarantee a minimum level of pension benefits, which is the case for DB plans
provided that the employer is solvent. However, some minimum level op adequacy could be
arranged via a national anti-poverty program.
Table 4.4 gives an overview of the several pro’s and con’s of DB and DC plans.
Table 4.3 Advantage and disadvantages of DB and DC plans
DB
DC
Advantage
Disadvantage
* No investment risk
* Employer solvency risk
* No disability risk
* Portability risk
* No longevity risk
* Problems with vesting
* No employer solvency risk
* Investment risk
* Lower portability risk
* Disability risk
* More easily vested
* Longevity risk
Source: Author
4.2
Remarks on designing pension plans
Besides the major choices in designing a pension plan, there are also a few other features that
deserve attention. First of all, it is important to impose a minimum retirement age to assure that
benefits are only paid to the old and that early retirement is discouraged. By limiting access, it
curtails individuals’ myopia and self-control problems (Mitchell et al. 1996). Secondly, by paying
pension benefits in the form of life annuities, it protects individuals against outliving their pension
benefits. Lump-sum benefits do not protect against this risk, nor does it prevent moral hazard or
adverse selection. Thirdly, a single national anti-poverty program that alleviates everyone (young and
old) from poverty is useful. It makes sure that a pension plan is not diverted from its primary
purpose, which is to insure against economic uncertainty in retirement.
A last remark for designing a pension plan is that designers should not want nor can they eliminate
all risk. For instance, it could be that no party is willing to insure the risk, because of very high
uncertainty and high costs. Even a well-designed pension system cannot guarantee retirement
security against international risk caused by disastrous global events. Furthermore, Rothschild and
Stiglitz (1976) concluded that even if full insurance is possible, it is generally not desirable.
Page | 21
1
5. The pension system in Chile
The section starts with a brief historical overview of the Chilean pension system, afterwards it will
mainly focus on how the three-pillar system operates in Chile. An elaboration on each of the pillars
will be given and additional features of the Chilean model are presented. Lastly, Chile’s system is
being analyzed on its strengths and weaknesses.
5.1
Historical overview
The pension system in Chile is unique and Chile was one the first countries to drastically reform its
system into a fully funded system. The Chilean model has been used in many other countries in the
world as an example of how to reform their pension system. Up to now, 11 Latin American countries,
7 Central and Eastern European countries and one country in Asia have reformed their own pension
system in accordance with Chile’s system. Before elaborating on the details of this model, a brief
historical overview is given, in order to place Chile’s reform in the right perspective.
In 1924, Chile created a mandatory pension system for a part of the labor force. The government
gave the Social Security Institutions (SSIs) the responsibility of running the system. It started off as
fully-funded schemes, however, they were very unsuccessful and did not even operate for 30 years.
A major reason for the breakdown of the system was that pension reserves were exhausted due to
restrains on the investment opportunities and low returns to investments. Additionally, the pension
reserves were used for other social security benefits like health care benefits. The unsustainable fully
funded system was reformed in 1952 into a PAYG system, with defined benefits. The reform
consisted also of a rise in contribution rate and varying retirement ages between genders. The SSIs
were still in charge of operating the pension system, but failed in strongly enforcing regulations and
they were susceptible to pressure of labor unions who wanted to increase the benefits more than
the contributions. Moreover, the inequality gap of income widened as the poor elderly were barely
covered in the system, while the participants of the middle class profited significantly of a variety of
subsidies that were handed out and paid by budget surpluses that were generated in the beginning
of the reform.
With contributions rates rising from 16 to 26 per cent of wages, contributions made by the
government amounting to 38 per cent of the system’s total revenues, an implicit debt of more than
100 per cent of GDPand unfavorable demographic trends, it did not take long before the entire
system again showed signs of failure (Rodriguez 1999). Therefore, during the 1970s a group of
academics was appointed to design and eventually put into operation a new pension system. The
Page | 22
1
PAYG system would be replaced by a fully funded system consisting of individual capital accounts
that were privately managed and administered by the Pension Fund Management Companies
(Administradoras de Fondos de Pensiones, AFPs). In order to let the reform run smoothly, it
consisted of two phases. In 1979 the first phase started in which a standardized indexation
instrument was adopted and the minimum retirement ages, which were 65 years for men and 60
years for women, were lowered. Additionally, retirement based on contribution years became easier
to reach as the amount of contribution years was lowered. The second phase started in 1981, when
there was the radical switch from a PAYG system to a fully funded system. The old one pillar system
was slowly transformed into a three pillar system. By disconnecting the first and second pillar
entirely, the redistributive and saving function were separated.
The goal of the reform was to establish pension benefits that would be equal to at least 70 per cent
of an employee’s final wage. The system aimed to perform several functions such as; giving
individuals freedom of choice but on the other hand still showing solidarity, it should be a system
that is fair and at the same time efficient and most importantly it should profit the entire Chilean
population.
5.2
Overview of current pension system in Chile
Since 1981 the Chilean pension model gradually changed from a one pillar to a three pillar system.
First, the three pillars will be explained, followed by additional features of the system. Table 5.1
presents Chile’s current pension system.
Table 5.1 Current pension system in Chile
Types of Plan
First pillar
Old age redistribution and insurance:
-
-
Management
Government
Assistance pension for non-
- Means tested, non-
participating old-age poor
contributory
Minimum pension guarantee
- Means tested,
for participating old-age poor
contributory
at retirement
Second pillar
Old age saving and insurance
(mandatory)
Third pillar
(voluntary)
Old age saving
Fully funded
Private industry of pension
DC
fund managers (AFP)
Fully funded
Private industry of pension
DC
fund managers (AFP)
Source: Schmidt-Hebbel (1999)
Page | 23
1
5.2.1
First pillar
The first pillar can be seen as a supplement to the second pillar, with its two means-tested programs
that are particularly designed for the poor elderly. The first program covers all elderly who have not
1
contributed for 20 years to the pension system and they will receive an assistance pension of roughly Page | 24
€ 46 per month from the state (Schmidt-Hebbel 1999). The second program is meant for participants
of the second pillar to reach a minimum pension level. The minimum pension guarantee is equal to
26 per cent of the average taxable monthly wage. Participants of the second pillar are eligible for this
extra benefit if they are 65 years old for men or 60 years old for women and they must have
contributed to the pension system for a minimum of 20 years. The last criterion is that they do not
have any other earnings that are beyond the minimum pension level. The first pillar is not funded by
workers’ contributions, but via general government revenues instead.
5.2.2
Second pillar
All employees are obliged to contribute 10 per cent of their wage to their own individual pension
account each month. If an employee earns more than approximately € 20,000, he or she does not
have to pay this percentage for the earnings above this threshold. The contributions and returns
earned on investments belong to the employee and are tax deductible. If an employee wishes, he or
she is allowed to contribute more than the 10 per cent to the same pension fund and these extra
contributions are again tax deductible. The contributions and the returns net of fees and
commissions paid to the AFPs are registered in the individual accounts.
The AFPs are responsible for collecting the contributions, investing the contributions and keeping a
record accordingly. The employees are entitled to freely choose among the AFPs and switching
between AFPs is allowed with a maximum of twice a year. It is not allowed for labor unions or
employers to negotiate for their members or employees, respectively, since discrimination between
groups or individuals in an AFP regarding the rate and commission is forbidden. The responsibility
and freedom really lies at the individual.
The minimum retirement age is set at 65 years for men and 60 years for women. However, it is
possible to retire early if the employee has reached an accumulated pension savings that is
equivalent to a benchmark of pension level. This means that a participant is able to buy an annuity
that is firstly equal to minimally 50 per cent of his or her average wage during the last 10 years of
service. Secondly the accumulation is equal to at least 110 per cent of the minimum pension
guarantee of the first pillar. Postponing retirement, on the other hand, is also an option. Upon
retirement the participant can choose between three methods of benefit payment. The first option is
to purchase a lifetime annuity from an insurance company, which will assure a constant level of
income over a person’s remaining lifetime. The second option is programmed withdrawals in which
the accumulated contributions stay in the individual account and the retiree makes programmed
withdrawals from it. The amount of the withdrawal is, for instance, dependent on a retiree’s life
expectancy. The third option combines the first two and is called temporary programmed
withdrawals with a deferred lifetime annuity (Rodriguez 1999).
5.2.3
Third pillar
The third pillar consists of two categories of voluntary savings that are made attractive via tax
incentives. The first category comprises of extra contributions that are made together with the
mandatory contributions of 10 per cent of payroll. This option was previously mentioned, and enjoys
the same tax exemptions as the mandatory contributions. The second category relates to extra
contributions that are made to a different, second individual account. In this case only the returns
are tax exempt and the principle is not. Participants can withdraw from this second individual
account whenever he or she pleases.
5.3
Other features of the reform
After the elaboration on the three pillars, this part will continue with more features of the reform
and of the current system.
5.3.1
Gradual transition
The reform of 1981 from the PAGY system to a fully funded one is still an ongoing process. Both the
PAYG and the fully system are in place. This will remain the case until all of the pensioners of the old
system have passed away, which will probably be after 2065. In 1981, the PAYG pensioners at that
time stayed in the old system and new labor force members were forced to join the new fully funded
system. For existing employees there was a special arrangement. The active participants could either
stay in the old PAYG system or they could change to the fully funded system. A switch to the new
system was made attractive via lower pension contributions of nearly 10 per cent points of taxable
income. Both the government and the AFPs held major marketing campaigns and information
sessions to inform people about the attractiveness of the new system. The efforts and incentives
paid off as in only 19 months already 36 per cent of the employees had switched and this figure
reached 61 per cent in 1997 (Schmidt-Hebbel 1999).
Page | 25
1
The transition obviously involves costs, which can be divided into three types. Firstly, the
government needs to pay the retirement benefits of the employees who where already retired at the
time and of the ones that stayed in the old system. This type corresponds to the largest share of the
total costs (Rodriguez 1999). The second type refers to the payment of recognition bonds that were
given to employees who switched from the old to the new system. To compensate the employee for
the previously made contributions to the PAYG system, he or she receives a recognition bond of the
government that matures at his or her retirement. The government will then pay an amount that is
equal to the present value of the retiree’s historical PAGY contributions. The last type relates to the
first pillar with the new safety net for the poor elderly, which did not exist in this manner before the
reform. This last type of cost is different from the other two types, since this type will continue to
exist, whereas the other two will cease to exist in the future.
The government used various finance methods. Just before the reform in 1981, the state started with
tightening the fiscal policy significantly, which lead to a substantial fiscal surplus. Furthermore,
government bonds were issued, state owned enterprises were sold, government expenditure was
cut and government revenues (especially revenues from value added tax) rose via astonishing
economical growth for more than a decade after the privatization of the pension system. Rodriguez
(1999) argues that the pension reform actually has not added a burden to Chile and that the
sustainability of the system is increased.
5.3.2
The role of the government
The government acts both as a regulator and as a guarantor. An independent government institution,
the Superintendency of Pension Fund Administrators (Superintendencia de Administradoras de
Fondos de Pensiones, SAFP) was created to oversee and regulate the new pensions system. The
government also performs the role of a guarantor in the sense that it offers several safety nets. In
the first pillar it gives pension assistance to the poor who did not contribute for at least 20 years and
employees with a contribution record of at least 20 year who are eligible for a minimum pension
guarantee. In addition, the government guarantees a minimum return on pension funds. If the AFP is
not able to achieve the minimum return, its license will be repealed and the government covers the
underperformance. Lastly, there is also a government guarantee on pension life annuities purchased
from the life insurance companies by the retirees.
5.3.3
AFPs
The pension funds in the fully funded system are managed by the AFPs, whereby the AFPs are under
tight supervision of the SAFP. Moreover, AFPs are heavily regulated and are allowed to only manage
Page | 26
1
one fund. Apart from being subjected to regulations on the investment portfolios that limit the
holding of certain financial instruments, AFPs are mandated to keep minimum capital and pension
fund reserves. These reserves of 1 per cent of pension fund assets are necessary as back up in case
there exists a difference between the APF’s annual real return on the pension fund and either 2 per
cent of or 0.5 times the industry’s average pension fund return (whichever is higher). If the APF’s
return is lower than this returns it will have to use its reserves to finance the shortfall. On the other
hand, if the APF’s return exceeds the previously mentioned figures of return, it will have to credit the
surplus to a profitability reserve. This profitability reserve could again be used in the case of
shortfalls. Due to the regulations on minimum and maximum returns, the return variance among
APFs is low. The Chilean government estimates that the average annual return has been
approximately 11 per cent since the establishment of the new pension system (Rodriguez 1999).
The AFPs earn their money by charging fees and commissions for managing the individual accounts.
A fee will have to be paid to open an account, additionally fees are raised proportionally over the
(voluntary) contributions made and for administering programmed withdrawals (Ruiz-Tagle). To
stimulate competition it is not allowed to charge a fee for exiting the AFP.
5.4
Results of the pension reform
Since the Chile reformed its pensions system already more than 25 years ago, some preliminary
conclusions can be drawn on the positive and negative aspects of the reform. It is preliminary since
the transition is actually still ongoing and it will take at least another generation before more
definitive conclusions can be derived. Nevertheless, there are a number of areas that can be pointed
out that have improved since the reform and of course also negative features and future challenges
are present.
5.4.1
Positive effects of the reform
The positive effects or features of the reform can be summarized into five main points. First, by
reforming its PAYG system into a fully funded system Chile avoided severe problems with the ageing
of its society, as many PAYG countries are now facing. As said in the previous section 4.3, fully funded
systems are better able to handle the rising life expectancies and falling fertility rates than PAGY
systems. Figures 5.1 and 5.2 show that Chile is also faced with an ageing society, which could have
led to threatening the sustainability of the system, if they kept the PAYG system. Thus the Chilean
government disarmed the fiscal time bomb at the right time. The figures show that life expectancies
are continuously rising and that fertility rates have started to fall since the mid-1960s.
Page | 27
1
Figure 5.1 Life expectancy at birth in Chile
Page | 28
1
Source: United Nations (2008)
Figure 5.2 Fertility rates in Chile
Source: United Nations (2008)
Secondly, labor markets have improved since the adoption of the fully funded system. By reducing
the rate of taxes on wages, it gave an incentive to create more jobs as labor became cheaper. Figures
on the unemployment show that it decreased significantly from 15 per cent in the 1970s to just 5 per
cent in the 1990s (Rodriguez 1999). Moreover, lower tax rates made working in de formal sector
more attractive and indeed the informality decreased. Finally, the male labor force participation
increased with nearly five per cent points in 20 years (Schmidt-Hebbel 1999).
Thirdly, the liberalization and capital market reforms had a positive effect on the development and
diversification of the banking and capital markets. Evidence of this effect can be found in the major
rise in broad financial liabilities estimated by M3 and additionally in the capitalization of the stock
market. The liberalization facilitated in upgrading the financial instruments and industries (e.g.
deepening the bond market and developing the risk-rating industry).
Fourthly, another sign of a good performing fully funded system is if employees decide to retire early.
Chile sees more and more employees retiring earlier. As there are certain restrictions on retiring
early, which have been mentioned before, it shows that employees are accumulating enough money
to support themselves during retirement. Another advantage is that it permits people to make their
own decisions on how to spend their time on work and leisure. People have more freedom to act
according to their preferences. Not only do more employees retire early, they also tend to receive
higher pension benefits (Rodriguez 1999).
Fifthly, as said in the beginning of this chapter, the goal of the reform was to assure pension benefits
of at least equivalent to 70 per cent of employees’ last wage. This goal has been achieved and shows
that the reform has done what it was set out to do. An extensive research by Baeza and Bürger
(1995) indicates that on average the pension benefits were equal to 78 per cent of the employee’s
average wage of his or her last 10 years of service. For early retirees this percentage was even higher,
with 81 per cent of their average wage.
Besides achieving the benefits of 70 per cent of last wage, the reform also led to more Chileans
having a pension savings account and making contributions to them. The country’s saving rate rose
significantly after the reforms and approximately 31 per cent of this rise is explained by the pension
reform. Other reasons were, for instance, fiscal changes and tax reforms.
5.4.2
Negative effects of the reform and future challenges
Apart from the positive effects there are evidently also negative effects and areas that could create
challenges in the future. This subsection will discuss five apparent negative issues resulting from the
pension reform. To begin with the marketing costs of the AFPs that are arguable high and there is
excessive switching between AFPs. Limited and restricted by many regulations it is very hard for AFPs
to differentiate themselves from the others. Yields to investments and riskiness are nearly the same
for every AFP (further elaboration on this later), which means that the AFP can only set itself apart by
offering better customer service. The AFPs use many sales representatives to attract more clients via
numerous of marketing campaigns. This has resulted in excessive switching of AFPs. The link between
high marketing costs and excessive switching of AFPs works both ways. Via more marketing, people
become more aware of the different AFPs. On the other hand if AFPs notice that participant switch
often, they will try to acquire as much of these new clients as much, for which the AFPs need to
market themselves. The marketing and sales costs were estimated to be over 30 per cent of total
costs of the AFPs in the 1990s (Ruiz-Tagle 1998).
Page | 29
1
Secondly, there are too many restrictions and regulations which interfere with the competition
between AFPs. The limits on holding particular financial instruments prevent the investments-options
from getting closer to the optimal risk-return trade-off. If, for instance, a person is more risk tolerant
he or she would prefer to choose a fund with a higher risk profile and higher returns, but it is not
possible to find a fund that suits his or her preferences. For example, the ceiling for investments in
foreign assets was very low, which limited the option to internationally diversify the portfolios.
Moreover, the guarantee of a minimum return leads to herding behavior of the AFPs regarding
investment plans and consequently results in nearly identical portfolios among the AFPs. Therefore,
the freedom of individuals to choose the pension fund that suits their preferences is rather
overstated.
The restrictions and heavy regulations were originally designed for safety purposes and preventing
excessive risk taking behavior, but once the system started to mature these should have been
removed or at least partially lifted. If this is carried out, it will enable AFPs to specialize in investment
plans, leading to different portfolios. This gives employees an actual option to choose a suitable
pension fund and it results in more (price) competition among the AFPs. It would also reduce the
high marketing costs that were stated earlier, as AFPs can set themselves apart more easily and need
less marketing to convince employees to open an account at their fund.
Thirdly, although the coverage of the new system is higher than the old one, nearly one third of the
labor force is still not covered. This part of the labor force consists mainly of workers in the informal
market who are too poor to make contributions to a pension system and of the self-employed. It is
not mandatory for the self-employed to have an individual account and to make regular pension
contributions. Another problem is that mainly low-income employees are not covered compared to
high-income employees. This poses higher costs for the government as these low-income employees
need significant social assistance.
Fourthly, the commission structure is inefficient. The Chilean law does not allow the APFs to charge
different commissions to different participants and this is also the reason why collective negotiations
not permitted. This constraint imposes extra costs on the AFPs and eventually the contributors. A
negative effect is that it is not possible to benefit from economies of scale for the marketing and
contracting costs. Another disadvantage is that it results in a rigid commission structure that does
not show the cost variances between participants. On top of that, the participants switch very often
from one pension fund to another. Lastly, the inefficient commission structure results in higher
Page | 30
1
commissions. Thus the law should be amended to make a more flexible commission structure
possible.
Fifthly, the minimum pension guarantee in the first pillar imposes relatively high fiscal costs and gives
1
an incentive for moral hazard. First of all, the guarantee gives an incentive to not make any voluntary Page | 31
contributions. Another issue is that employees with low incomes will make infrequent contributions
for just 20 years to qualify for the pension guarantee, if they know that the pension guarantee is
higher than what they would otherwise have in their individual account.
Finally, high transition and administration costs are sometimes mentioned as negative side effects of
the pension reform. However, other studies refuted these arguments (Rodriguez 1999) and therefore
they are not further elaborated on. Further research on transition and administration costs is
advised, in order to give a more conclusive answer to the question whether they are too high or not.
All of the earlier mentioned advantages and disadvantages of the Chilean pension system are
summarized in Table 5.2 below.
Table 5.2 Advantages and disadvantages of the Chilean pension system
Chilean pension system
Advantages
Disadvantages
* Able to cope with the ageing
* Excessive switching and high
society
marketing costs
* Labor markets improved
* Restrictions and regulations
* Development and diversification
interfere with competition of AFPs
of banking and capital market
* One third of labor force is not
* Early retirement shows enough
covered
accumulations for retirement
* Commission structure is
support
inefficient
* Benefits at least equal to 70 per
* Minimum pension guarantee
cent of last wage
imposes fiscal costs and is an
incentive for moral hazard
Source: Author
After describing and analyzing the Chilean pension model, the next section will continue with the
same process for the Brazilian pension system.
6
The pension system in Brazil
This section describes the historical developments in the Brazilian pension system, afterwards the
current system is being outlined. Subsequently, the challenges faced by Brazil in terms of the pension
system are discussed. In particular, there will be a focus on five critical issues that threaten the
sustainability.
6.1
Historical overview
Contrary to many Latin American countries that adopted pension reform plans in accordance with
the Chilean pension reform model, Brazil took a different approach for reforming its pension plan.
Before outlining the current Brazilian pension system, a short historical overview is presented. It
gives insight into the path dependency of the country and the distortions of the current system due
to historical reasons. Melo (2004) found that path dependency was one of the reasons the Brazilian
government decided not to privatize the system.
6.1.1
The origin of the Brazilian pension system
The first proposals for a pension system in Brazil were initiated to provide income insurance for
special groups. These groups usually consisted of the military and civil public servants. It took until
1923 before parts of the private sector (e.g. railroad workers and stevedores) were also covered. The
first pension plans were characterized by funded plans with low coverage. Over the decades, other
parts of the private sector slowly became covered as well. During the 1960s the pension system
underwent a radical change from a funded plan to a pure PAYG plan with defined benefits paid for
via payroll taxes. The previous plan was no longer sustainable since first of all, the government could
not fulfil its obligation of contributing in the three-party scheme of employee, employer and
government. Secondly, the accumulated pension reserves were not managed properly (Oliveira, and
Beltrão 2000).
Besides the transition of funding method, the 1960s also involved the creation of the National Social
Security Institute (Instituto Nacional de Previdência Social, INPS). This institute became solely
responsible for the pension plans of all employees, apart from the civil servants, and the selfemployed. In the 1970s expansion of the pension benefits took place and the coverage extended.
Moreover, the situation for the elderly above 70 years who did not have any kind of income was
improved via the introduction of a flat means-tested benefit.
Page | 32
1
During the next decade the Brazilian economy experienced a crisis, in which GDP growth rates were
minimal, the inflation rate rose and the exchange rate deteriorated. Combined with a major change
in political regime it urged for significant changes in the pension system as this system was no longer
sustainable. The 1988 Constitution transformed the Brazilian pension system into a more universal
system, with a design that was influenced by the post-war European pension model (Pinheiro 2004).
6.1.2
1988 Constitution
Although the Brazilian pension system became more universal, by giving urban and rural workers the
same rights, there still existed a difference between workers in the public and private sector. The
private sector workforce was covered in the General Regime for Social Security (Regime Geral de
Previdência Social, RGPS) and the Civil Servants Regime (Regime Jurídico Único, RJU) provided for the
entire public sector workforce.
The Constitution contained, among others, the following rights and rules for the RGPS (Oliveira, and
Beltrão 2000):
-
The social assistance and benefits for the workers of the rural areas were doubled.
-
The minimum eligibility age for rural benefits was lowered by five years.
-
Benefits were fully indexed for inflation, to maintain a certain real purchasing power for the
beneficiaries.
-
The minimum amount of benefits is equal to the minimum wage.
-
The system was financed via taxes on wages, gross revenues, profits and other general tax
revenues.
In the RGPS the benefits were very generous, which had an adverse effect on the sustainability of the
system. Indeed it became too costly to maintain the system as time passed by. The situation for the
civil servants in the RJU was even better as tenured employment was guaranteed and benefits
received upon retirement were equal to the final wage.
During the 1990s Brazil endured another high inflationary period, in which the INSS was created to
serve as the institution responsible for the RGPS . Additionally, the first voices for radical privatization
like the Chilean model were raised. However, the government was too busy stabilizing the economy
and lowering the inflation, to pay any attention to it. Moreover, the president at the time did not
have enough political support to defend such a drastic change. Nevertheless, the discussion about
privatization by academics and representatives of the financial sector continued but faced problems
as they could not clearly explain the effects of the pension reform to the general public and the high
inflation postponed the necessity for a reform to restore the fiscal balance. Other Latin American
Page | 33
1
countries were challenged earlier with fiscal deficits than Brazil. The enduring periods of high
inflation in Brazil had resulted in extra earnings via investments of the pension reserves at high
interest rates, while at the same time the costs were lower through the declining real value of
pension benefits (Pinheiro 2004).
Page | 34
1
In the middle of the 1990s the government realized that the deficit on the social security balance
grew exponentially, due to problems with funding the benefits and the ageing of the society. The
situation deteriorated severely enough to impose a threat on the stability of the national economy. It
took another couple of years of heavy debates and pension reform proposals before an actual reform
was agreed upon in 1998. It was decided that Brazil would preserve its PAYG system, since the
estimates for transforming the system into a fully funded system like in Chile were unaffordable for
Brazil. The cost calculations for the transition period were said to range from 188 per cent to 255 per
cent of GDP (Ferreira Savoia 2007). These high costs would arise if the defined benefit schemes were
replaced by individual accounts because the government would no longer be able to collect the
mandatory pension contributions and thus would have to fund the individual accounts herself, until
the system could support itself.
The most influential changes of the 1998 reform were that the eligibility for retirement by age for the
RJU was tightened, the formula for calculating the benefits in the RGPS was modified and several
measures to limit the deficit on the pension budget were adopted (Pinheiro 2004). Unfortunately,
proposals to also impose a higher retirement age in the RGPS were rejected. The fierce resistance by
various oppositions and the privileges held by particular groups, made it very difficult to approve
further major changes.
Although, the 1998 reform was heading in the right direction to ensure the sustainability of the
pension system, it still lacked the commitment and power of all government institutions to really
overcome all problems. Starting from Lula’s presidency, the administration started to focus more on
reforms in public pension system, which remained nearly untouched throughout history due to
missing political support. In 2003 another reform was approved that had several implications for the
current and future generations in the RJU. For the current generation the retirement age was further
increased and reductions were implemented in case of early retirement. Additionally, an exemption
for the contribution rate was allowed if public workers postponed their retirement. The adjustments
for future generations were more rigorously as the formula for calculating the benefits would use the
average wage of a public worker’s entire career instead of setting the benefit equal to the last wage.
Moreover, an upper limit is imposed on the received benefits (Pinheiro 2004).
Thus the reform of 2003 included radical changes for the public workers of the current and future
generations. However, the situation could still be further improved as section 6.3 will address some
essential matters that influence the sustainability of the pension system.
Page | 35
1
6.2
Overview of the current pension system in Brazil
The current pension system in Brazil slightly deviates from the earlier mentioned multi-pillar format
of the World Bank. Not only does Brazil have a zero pillar, but also the second pillar deviates from the
format. The Brazilian system is best summarized by Table 6.1. Furthermore, Table 6.2 presents
figures on the Brazilian population, to give an impression of the size of the Brazilian population and
the pension system.
Table 6.1 Current pension system in Brazil
Zero pillar
Poverty Relief – Social Assistance
First pillar
General system, RGPS
(mandatory)
Types of Plan
Management
Non-contributory
Public: INSS
PAYG
Public: INSS
Special system, RJU
-
Federal
PAYG
Public: INSS
-
States
PAYG
Public: State governments
-
Municipalities
PAYG
Public: City councils or INSS
DB and DC
Mixed: Pension fund
Second pillar
Closed pensions
(mandatory)
for new civil servants
Third pillar
Open pensions for all workers
DB and DC
Private: Financial systems
(voluntary)
Closed pensions for all workers
DB and DC
Private: Pension funds and
multi-employer funds
Source: Ferreira Savoia (2007)
Table 6.2 Figures on Brazilian population 2007
Type of people
Amount of people
Total population
190,000,000
-
Urban
159,000,000
-
Rural
31,000,000
Economically active population
-
Occupied
-
Non-occupied
99,000,000
91,000,000
8,000,000
Not economically active population
61,000,000
Occupied population by position
91,000,000
-
Employees

Formally registered

Public servants and military

Others and without declaration
59,000,000
32,000,000
6,000,000
21,000,000
19,000,000
-
Autonomous workers
-
Employers
4,000,000
-
Workers for self-consumption
4,000,000
-
Non remunerated
5,000,000
Contributing to social security in any job
46,000,000
Source: Ministério da Previdência Social (Department of Welfare) 2009
6.2.1
Zero pillar
The zero pillar serves as poverty relief for the elderly of 65 years or older from either the rural or
urban areas and for the disabled people who cannot work nor support themselves. This social
assistance program pays the eligible a monthly means-tested benefit that is equal to the Brazilian
minimum wage, which is 465 Real or approximately € 170 (Ministério da Previdência Social 2009).
The criteria for eligibility is set at a family income less than ¼th of the minimum wage, where a family
is defined as a group of people living under the same roof (Ministério da Previdência Social 2009).
These social assistance benefits are non-contributory and financed by government revenues.
This pillar has been in operation since the 1990s and has successfully reduced poverty among the
poorest elderly (Ferreira Savoia 2007). Without the poverty relief there would be far more elderly
and disabled people living below the poverty line (Barrientos 2003).
Page | 36
1
6.2.2 First pillar
This pillar is actually divided into two separate systems. The first one, the General system RGPS,
covers the employees of the private sector. Employees and employers are obliged to pay
contributions to the publicly managed PAYG scheme, where the contributions are used to cover the
1
benefits of the current retirees. The contributions are wages dependent, since employees are obliged Page | 37
to contribute 8 to 11 per cent of their wage and employers have to pay 20 per cent of payroll. There
are approximately 36 million contributors and the INSS collected contributions worth of nearly 5.5
per cent of GDP (Ministério da Previdência Social 2009). Nevertheless, this amount was not enough
to cover the benefits, which were a little over 7 per cent of GDP.
Retirement by age is reached at the age of 65 years for men and 60 years for women in urban areas
and 60 years and 55 years respectively in the rural areas. Retirement by contribution time is also
possible and this will be after 35 years for men and 30 years for women. The minimum benefit that is
guaranteed is equal to the monthly minimum wage and it will not be higher than the maximum
contributory wage limit of roughly 2890 Real (Ministério da Previdência Social 2009). The exact
pension benefit can be calculated with the following formula (Ministério da Previdência Social 2008):
(3.)
With
Pb = Pension benefit
M = Average of the 80% highest contribution wages of the employee during his or her
entire contribution time, inflation indexed.
f = Social security factor, which is defined as follows:
(4.)
With
f = Social security factor
Tc = Contribution time up to retirement time
a = Employee’s contribution bracket
Es = Employee’s life expectancy on the date of retirement
Id = Employee’s age on the date of retirement
The second system, the Special system RJU, covers the employees in the public sector. It is a more
complex system than the RGPS in the sense that it operates on different governmental levels, namely
on a federal, state and municipal level. The rules and regulations differ among the three levels and
each has different costs.
The pensions in the RJU are more generous than in the RGPS. For example, assuming the same
contribution time civil servants receive a pension that is equal to their last wage, whereas private
employees receive a pension that is less than a 100 per cent of their wage (see formula 3 and 4).
Additionally, as said before there is a ceiling limiting the pension a private employee can receive.
Another advantage of the RJU pensions over the RGPS pensions is that the contribution time for civil
servants before they can retire and receive full benefits is only 10 years compared to 35 (men) or 30
years (women) for private workers.
Another issue is that the RJU pays high benefits and the mandatory contributions are low causes
great deficits. In 2002 the deficit for the RJU was equal to 4.2 per cent of GDP (Ministério da Fazenda
2003). It took until 1998 before a mandatory contribution rate of 11 per cent of payroll was enforced.
6.2.3
Second pillar
Until now this pillar has not been put into operation, only the regulation has been stipulated. It will
be mandatory for future public workers.
6.2.4
Third pillar
The final pillar consists of complementary pensions that are voluntary and can either be in closed or
open funds. Closed pensions are only accessible to employees of a specific company, which have
particular collective benefits for that group and are operated by pension or multi-employer funds.
Open pensions, on the other hand, are available to everyone who wants to join and are provided by
financial institutions. Contributions are often paid to an individual account, which will be used to pay
out benefits upon old age.
Even though the participation level in this pillar is still relatively low, just 4 per cent of the population
in 2002, the pension funds of this pillar have a significant influence on the nation’s economy (Medici
2004). Not only do they increase the long-term savings (Studart 2000), they are also responsible for
buying many of Brazil’s treasuries (Ferreira Savoia 2007).
6.3
Challenges ahead
After analyzing the Brazilian pension system, several challenges and (potential) problem areas can be
identified. Ferreira Savoia (2007) found five critical matters that are either already of concern or will
Page | 38
1
most likely become a threat in the near future, based on trends and future predictions. If no
attention is paid to these matters, they can have severe effects on the long-term sustainability of the
pension system in Brazil.
6.3.1
Page | 39
1
Ageing of the society
One of the most worrisome concerns is the ageing of the society combined with falling fertility rates
and increased life expectancies. Although, Brazil still has a relatively young population, the trends for
the demographics are reasons for serious concern. Figure 6.1 shows the demographic structure of
the Brazilian population from 1975 until 2000 and predictions for the future.
Figure 6.1 Demographic structure of Brazil, in percentage of total population
Source: United Nations (2008)
From Figure 6.1 it can be seen that in 1950 the population structure still looked like a pyramid, while
currently this is no longer the case. Moreover, the future predictions made by the United Nations
(2008), suggest even more trouble. Reason for the trouble is that the younger part of the population
becomes ever smaller compared to the elderly. The amount of people in the labor force will decrease
and at the same time the amount of people eligible for pension benefits increases. This will have a
negative effect on the ratio between beneficiaries and contributors in the pension system,
particularly because Brazil’s first pillar is based on a PAYG system. Even though the social security
factor for calculating the benefits is being adjusted for the demographical changes, these
adjustments do not occur fast or high enough to keep up with the changes in demography. As a
result, a smaller labor force will have to contribute more to balance the funding for the benefits
received by a larger group of elderly (ceteris paribus). This reasoning is supported by figures reported
by the United Nations (2008) on the dependency ratio of the elderly to the total population, which
are presented in Figure 6.2.
Figure 6.2 Elderly dependency ratio
Source: United Nations (2008)
Factors influencing the population structure are among others fertility rates and life expectancies.
Both of these factors are currently working at Brazil’s disadvantage. The fertility rates are falling, as
can been seen from Figure 6.3. To be more specific, since the fertility rate is below two children per
woman this will lead to a shrinking population (ceteris paribus). It can be concluded that the amount
of new young people, who have to support the elderly, decreases which could make the
sustainability of the pension system questionable if no action is undertaken.
Page | 40
1
Figure 6.3 Fertility rates in Brazil
Page | 41
1
Source: United Nations (2008)
Furthermore, Figure 6.4 indicates that the life expectancy has been increasing throughout history
and will continue to rise, and eventually stabilize around 80 years. This increase can be explained by
improvements in the living conditions of the elderly on the one hand, and a significant lower rate of
child mortality on the other hand.
Figure 6.4 Life expectancy at birth
Source: United Nations (2008)
To sum up, the various demographical trends create substantial intergenerational costs and will put a
higher burden on the shoulders of future generations. These demographical trends of the Brazilian
resemble the ones of Chile (see Figure 5.1 and 5.2). Both countries have falling fertility rates,
reaching a level of less than two children per woman and increasing life expectancies of nearly 80
years.
6.3.2
Too generous benefits for public workers compared to benefits for private workers
Like many OECD countries, Brazil has a special pension system for public workers which are often
more generous than the system for the private workers, as was mentioned in the previous
subsection (Bonturi 2002). Nevertheless, Brazil is even more generous than the average OECD
country, since Brazilian public workers can receive benefits up to 100 per cent of their final wage
whereas most OECD countries use some form of a replacement formula that contains a part of the
final wage per year of service and is limited by a ceiling. It should be noted that the amount of
benefits paid to public workers in the OECD countries has been heavily criticized in the respective
countries, since it resulted in unaffordable pension liabilities. Therefore, countries such as the US,
Canada and the Netherlands have changed their regulations for public workers (Bonturi 2002). Brazil
should take this notion under advice, and realize that if the generally wealthier OECD countries
already face problems with sustaining these high benefits, it will even be harder for Brazil to continue
paying them.
The differences between the benefits of public workers and private workers are large. Figure 6.5
presents the average pension benefits among different groups of workers.
Figure 6.5 Overview pension benefits
Group
Average pension benefit
(based on 2004 estimates)
Special system
Administrative
€ 1100
Military
€ 1900
Legislative
€ 4750
Judges
€ 4500
General system
€ 210
Source: Ministério da Previdência Social (2009)
An explanation for these large inequalities can be found in the fact that public workers are better at
lobbying against reforms that would equalize the pension benefits, through for instance their better
contacts with politicians. In addition, the Constitution contains several privileges for public workers,
which enable them to have significantly higher benefits.
Page | 42
1
Apart from the higher benefits that the public works receive, they are also sooner eligible (both in
terms of age and contribution time) for receiving the benefits. Lastly, public workers contribute less
than private workers. All of these inequalities lead to great deficits in the budget of the pension
system of Brazil. In 2006, the deficit amounted to 5.8 per cent of GDP, of which 75 per cent was
caused by the Special system and only 25 per cent was due to the General system (Ferreira Savoia
2007). These deficits can not be maintained in the future, because the government cannot continue
to fund the shortages. The easiest way for the government to bridge the gap between revenues and
costs is to issue debt, but what happens if nobody wants to buy the government bonds anymore?
Another option is to cut spending in the pension system, while many people depend on the pensions
they receive. Alternatively the government could print money, yet this might threaten the stability of
the exchange-rate. Therefore, the generosity for the public workers will have to be curbed to avoid a
possible breakdown in financing the pension system.
6.3.3
Disparities in the retirement age and contribution time between men and women
There is not only a difference between the eligibility of public and private workers, but also between
genders in the General system. The retirement age for women is five years lower than the one for
men, while simultaneously women are expected to live at least seven years longer than men
(Ferreira Savoia 2007). These disparities sound counterintuitive in the sense that women not only
receive the benefits at an earlier age but they also receive them for a longer period. In total women
would receive on average 13 years worth of benefits more than men.
It is quite common to differentiate between the retirement ages of men and women. Reasons for the
difference could be to encourage the reproductive role of women or to compensate women for the
fact that they are on average physically weaker than men. Giambiagi and Castro (2003) found
multiple examples of countries with differences in retirement age. However, a difference of five
years is rather large and less frequently observed elsewhere. Combined with the trend that more
women start to participate in the labor force, it imposes a noteworthy amount of extra costs as not
all of the women contribute enough to the pension system. It will be hard to continue justifying these
extra expenses. Up to now, the explanation given by the government for the discrepancy of five
years is that women not only work at a company, but also have a second job once they come home.
In the Brazilian culture the women are responsible for raising the children, cooking and cleaning the
house. The allowance for earlier retirement could, for instance, be seen as compensating for the
second job. Perhaps a more suitable form of compensation would be to give a replacement income
when women are on maternity leave, under the assumption that it is possible to take maternity
leave.
Page | 43
1
6.3.4
Income inequalities and poverty
As said before the zero pillar undoubtedly improved the financial situation for many poor elderly, but
the current situation is still far from desirable though. Besley and Burgess (2003) concluded that
income inequalities faced by countries across the world are largest in Latin American countries. The
continent habitats over 175 million people living in poverty, this figure corresponds to 36 per cent of
the Latin American population. The presence of such high poverty levels will certainly have its effect
on the pension systems, in particular because there are many poor people who cannot contribute to
the system.
For Brazil the problems of income inequalities are even more severe than for Latin America in
general. Previous research conducted by Barros and Foguel (2000) shows that it would require 12 per
cent of social spending every year to eliminate poverty. The zero pillar has helped to reduce the
amounts of people living in poverty significantly. Figures of 2001 showed that approximately 34 per
cent of the population was under the poverty level and this figure would persist moving upwards if
there was no assistance for the poor elderly such as the zero pillar. Estimates indicate that the zero
pillar was able to reduce the poverty levels by 7.5 per cent (Ferreiro Savoia 2007).
Nevertheless, there is still room for improvement as many poor elderly are not yet reached by the
social program, leaving them without financial assistance. Baer and Galvão Jr. (2006) found in their
analysis that anti-poverty benefits like the zero pillar are poorly distributed and are usually not
directed to the people who need it the most. Additionally, a research performed by Neri (2001)
indicated that the top 10 per cent of pension benefits are worth nearly half of the value of all the
benefits that are paid. These two examples of research clearly indicate that the inequalities of
income are still reasons for concern and should be addressed in the future.
6.3.5
Informality
The informal market has grown steadily over the years, which puts pressure on the financial balance
of the pension system due to evasion of taxes and pension contributions. It was estimated that the
proportion of labor force active in the formal market as part of the entire market, fell from about 50
per cent in 1994 to roughly 45 per cent in 2002 (Medici 2004). Another study by Bonturi (2002) was
even more pessimistic, with rates falling from 59 per cent at the beginning of the 1990s to 45 per
cent at the end of the 1990s. Moreover, Bonturi (2002) suggested that informality is predominantly
present in the construction and agriculture sector. The work force in the formal sector will suffer
from the resulting deficit as the tax burden will increase for both businesses and individuals which
Page | 44
1
could limit the level of investments that consequently can lower the productivity. Eventually, these
effects will adversely affect the economic growth (ceteris paribus).
Ulyssea (2005) concluded that there are two reasons why workers end up in the informal sector;
either to have a higher income by evading the tax system or the workers have no other option since
they can not get a formal job. The tax evasion is to some extent even accepted by society and the
government lacks the power for enforcement of the laws.
Ferreiro Savoia (2007) suggests that there are three main reasons for the informality. Firstly, Brazil is
confronted with large migration flows of unskilled workers from the rural areas to the urban areas.
The formal sector in the urban areas cannot handle the high influx of new unskilled workers,
therefore these workers end up in the informal sector. Due to the fact that the informality is
widespread it is difficult to limit and penalize the informal workers. Proposals for programs to make
working in the rural areas more attractive have been proposed, but so far they have been rather
fruitless.
Secondly, the Brazilian rules and regulations concerning taxation are not clear enough and are
entrenched with endless bureaucratic procedures. Brazilian companies have to invest a lot of time
and effort to comply with the tax obligations. Therefore, tax evasion becomes attractive. Thus the
legislation needs to be clarified and simplified.
Thirdly, the pension contribution rates are rather high. Employees are obliged to contribute 8 to 11
per cent of their wages and employers 20 per cent of payroll. The high rates give an incentive to not
contribute and consequently have a higher income. To counterattack the evasion of the
contributions, the INSS has given several exemptions and lower contribution rates in specific cases.
However, this had as side- effect that the level of contribution revenues decreased.
The few measures that have been implemented to lower the informality are a good start, but the
country needs a more rigorous plan of attack to freeze the informality.
After describing the current situation of the Brazilian and Chilean pension system and analyzing the
problems both systems face, the next section will continue with comparing the two systems. It will
then become clear whether Brazil made the right decision for not reforming its pension system to the
Chilean privatized fully funded system like many other (Latin American) countries did.
Page | 45
1
7
Comparing the Brazilian and Chilean pension models
Prior sections dealt with the advantages and disadvantages of different types of pension schemes
and the situation in Chile and Brazil. This section will combine the three previous sections in order to
answer the research question of this paper; ‘Should Brazil reform its pension system according to the
Chilean pension model?’ The section starts with ensuring that the two countries faced the same
pension problem, followed by investigating which options both countries chose in reforming their
system and which options Brazil should make taking into account future developments that influence
the sustainability of its pension system. The section ends with a few policy recommendations for the
Brazilian government regarding the future of the Brazilian pension system.
7.1
Comparable pension system problems
Before examining whether the Chilean pension model should also be implemented in Brazil, it is
important to investigate whether both countries share the same country characteristics and pension
background. If the countries would face completely different problems it would not make sense to
evaluate whether the Chilean model would improve the pension situation in Brazil. Nevertheless, it
should be noted that the two countries will not completely resemble each other and every reform
will have to be adjusted to fit the country’s economic, social, political, demographic, financial and
political profile. The situation in Chile around 1981 will be compared to the current situation of Brazil,
as Chile reformed its system in 1981 and this paper evaluates whether Brazil should reform its
system now.
7.1.1
Demographic situation
The earlier presented Figures 5.2, 5.3, 6.3 and 6.4 depicted the life expectancy at birth and fertility
rates in the two countries respectively. Similarities in the demographic trends are visible; both
countries are confronted with rising life expectancies since the 1950s and the fertility rates have
been falling after 1965. It should be noted that not only the relative changes matter, but also the
absolute figures are of importance. The absolute figures deviate in the two countries, but it should
be taken into account that the difference in time (1981 for Chile and 2009 for Brazil) is mostly
responsible for this. The ageing of the Chilean society in 1981 was of course not as severe as the
current situation in Brazil, due to different stages of development. In 1981, Chile was still in the
beginning phase of developing itself in terms of, for example, creating better living conditions for the
elderly. In Brazil now, the living conditions are better since the country had more time to develop it
self and improve the living situation in the country. But overall the demographic movements in the
two countries can be described as comparable.
Page | 46
1
7.1.2
Economic situation
The economic states of the two countries are different, but this can be explained by the time
difference of more than 25 years. Both countries are developing countries and have started to
economically grow since the 1980s. However, since Chile’s situation is measured in 1981 and Brazil’s
situation in 2009 it is fairly obvious that the countries can not be in the same state, because Brazil
had another 25 years to economically grow. Figure 7.1 and 7.2 give an impression of the annual GDP
growth and the annual inflation change for Brazil and Chile. It can be argued that the Chilean GDP
growth is more volatile than the Brazilian percentage, whereas it is the other way around for the
inflation rate.
Figure 7.1 Annual GDP growth in Brazil and Chile
Source: ERS USDA (2008)
Figure 7.2 Annual change in inflation, Consumer Price Index in Brazil and Chile
Source: IMF (2008)
Page | 47
1
7.1.3
Political situation
At the time of Chile’s reform, the country was led by the dictator Pinochet. The dictatorship made it
easier to reform the pension system, as opposition was not tolerated and it was suppressed. The
political circumstances in Brazil are different, since there is no dictator. However, President Lula’s
administration does focus a significant amount of time and effort on improving the pension system
and gradually gains more political support for reforming the system. This will help if the Brazilian
government decides to make a radical switch to a fully funded pension system.
7.1.4
Government budget situation
The two countries are alike in their government budget positions. The Chilean government
maintained a budget surplus before the reform, due to prior tight fiscal policies. Brazil currently also
experiences federal budget surpluses. In 2008 the surplus was equal to over 4 per cent of GDP.
7.1.5
Problems in pension systems
Before Chile’s reform in 1981 it had a PAYG system which suffered from several problems such as the
high contribution rates for the employees, high government contributions, high implicit debt and
great income inequality. The current situation in Brazil shows much resemblance; the Brazilian PAYG
system faces pension budget deficits that need to be financed by the government and the income
inequality gap is still significant. Thus both have high government costs and experience income
inequalities. Brazil endures also high rates of informality, which lowers the coverage of the pension
system as many workers of the informal sector do not contribute.
To conclude, it can be said that the two countries are in many perspectives the same, which is
needed for the analysis in this paper to make sense.
7.2
Analysis of the options to structure the pension system
Section 4 outlined the options for structuring a pension system. It comprised of the decisions to have
a system that is; mandatory or voluntary, publicly or privately managed, fully funded or PAYG and
has defined benefit or defined contribution. This subsection will describe the options the Brazilian
and Chilean government chose to structure their pension system. In particular it will involve the first
pillar of Brazil and the second pillar of Chile. These are the pillars designed for the employees and
they show the most differences between the two countries. Subsequently, based on Brazil’s
characteristics and the advantages and disadvantages of the options it is determined which structure
should be chosen to suit the country as good as possible.
Page | 48
1
7.2.1
Structure choices made in Chile and Brazil
Taking into account the description of the Chilean and Brazilian pension systems in sections five and
six, respectively, Table 7.1 was constructed. The table summarizes the pension system designs in
Page | 49
1
both countries.
Table 7.1 Pension system design in Chile and Brazil
Mandatory or
Publicly managed or
PAYG or
Defined benefits or
Voluntary
Privately managed
Fully funded
Defined contributions
Chile
Mandatory
Privately managed
Fully funded
Defined contributions
Brazil
Mandatory
Publicly managed
PAYG
Defined benefits
Source: Author
7.2.2
How should Brazil structure its pension system?
With the use of the tables and argumentation in section 4 and Brazil’s characteristics that are
explained in section 6, the best pension structure for Brazil can be chosen.
Starting with the choice between a mandatory or voluntary system, Table 4.1 summarizes the
advantages and disadvantages of each option. A mandatory system is preferred over a voluntary
system as it will avoid having many people who do not contribute at all or not enough to the pension
fund due to myopia and self-control problems. With voluntary contributions it may very well be the
case that the government ends up paying high amounts for the anti-poverty plans or social
assistance, since the voluntary contributions combined with a minimum guarantee give an incentive
to dissave. The negative effect of having mandatory contributions is that it requires more
government regulations and is more costly in enforcing. The argument of the Worldbank (1994) that
it might particularly be difficult for a developing country, like Brazil, to administer and enforce the
regulations, does not necessarily have to apply for Brazil. The current Lula administration has shown
that it acts more vigorously in case of, for example, violations of the system than the predecessors.
To sum up, it is in Brazil’s best interest to have a pension system that is mandatory.
The second choice relates to having a system that is either publicly or privately managed. Section
4.1.2 argues that a publicly managed system only has the small advantages of having lower
marketing costs and it is better in profiting from economies of scale. Whereas one of the major
arguments against publicly managed pension systems is that it usually has below market yields due
to mandatory investments in government bonds. Funds in a privately managed system generally
benefit from having more freedom in choosing investment options and there is more competition
which benefits the employee by higher investment returns. The higher investment returns will lead
to higher pension benefits. The higher benefits can offset the extra marketing costs and the lower
economies of scale. Therefore, a privately managed system seems more beneficial for Brazil. If the
government wishes, it can first impose several investment restrictions and implement certain
guarantees for safety purposes and to limit excessive risk taking behavior. Additionally, it gives the
financial market the possibility to develop and deepen, so that the financial market is better able to
make sound investment strategies. The current financial market might be too inexperienced with
investing such large pension assets. Chile did this as well, but it should be noted that once the system
has been operating for a while it is advised to lift these restrictions again as they could limit
competition.
Thirdly, a fully funded or PAYG system should be selected. As illustrated by Table 4.3, central in this
decision is the demographic factor. The Brazilian population is characterized by increased life
expectancies (see Figure 6.4) and dropping fertility rates (see Figure 6.3). Brazil’s society is ageing
and this is a trend that threatens the sustainability of a PAYG system. The PAYG system cannot cope
with the ever becoming smaller group of contributors and growing group of beneficiaries. This is
contrary to a fully funded system, where the Brazilian demographic trend does not pose a danger to
the sustainability of the system.
The last choice is between defined benefits and defined contributions. Since a fully funded system is
in principle equivalent to having defined contributions, it can already be said that defined
contributions are most suitable for Brazil. Furthermore, Table 4.4 gives an overview of the various
pro’s and cons of the two types of benefits. The defined benefits have the advantage of making
evasion of contributions less attractive, as an employee’s benefit will depend on his own
contributions. There is no employer solvency risk, nor portability risks. Employees in the Chilean
model can switch AFPs if they wish and since they make contributions to individual accounts,
changing their job does not influence the arrangements for his or her pension fund.
To conclude, by analyzing the advantages and disadvantages of the various options for structuring a
pension system in general and Brazil’s characteristics, the most suitable and sustainable pension
system for Brazil would consist of a mandatory, privately managed fully funded pension system with
defined benefits. This is exactly the same as how the Chilean pension model is constructed. Thus, to
improve Brazil’s system and to make it more sustainable it is advised to reform into a pension system
like the Chilean model.
Page | 50
1
7.3
Policy recommendations
It was just established that Brazil should reform its pension system in accordance with the Chilean
model. Earlier in this paper the positive and negative effects of the Chilean pension reform have
1
been presented and especially the negative effects are of interest since the Brazilian government can Page | 51
learn from these problems and mistakes. In this subsection a number of policy recommendations are
given on how to the implement the Chilean model in Brazil and how Brazil can learn from the
mistakes that Chile made.
The transition will be accompanied with costs. Examples of these costs were given in section 5. High
transaction costs were one of the major reasons in the past why the Brazilian government did not
reform its system into a fully funded pension system. However, Brazil is currently running a budget
surplus, like Chile did before the reform, which could be used to finance the transition. Furthermore,
Brazil could copy other finance methods of Chile, like cutting the government expenditure and
issuing government bonds. It is advised to gradually transform the pension system, as this will result
in lower public resistance because it places a lower burden on the current generations.
The transition cost might be high, but running a system that is not able to handle the demographic
trends, one of the major Brazilian problems, it will threaten the sustainability and will lead to growing
shortfalls which will have to be financed by the government. Additionally, Chile’s experience tells
that more people were covered after the reform and they received higher benefits. These
advantages outweigh the (potentially) high transition costs, costs that otherwise could also be
incurred by running large deficits.
Although the investment regulations and restrictions are now a burden for the Chilean pension
system, it might still be recommended to implement them in Brazil as well. Not only for safety and
profitability purposes, but also to give the capital and financial market the opportunity to develop
themselves without encountering great risks. Nevertheless, these regulations should become less
strict and restrictions should be gradually lifted once the markets have gained experience in investing
such large pension funds and when they are better able to make sound investment plans. If they are
not lifted later on, Brazil will have the same problem as Chile with limited competition and higher
costs.
Apart from reforming the second pillar PAYG system into a fully funded, Brazil should also have a first
and third pillar like Chile. Not many changes are necessary as Brazil’s current zero pillar resembles
the first pillar of Chile and both third pillars are nearly similar. An anti-poverty program in the first
pillar, for the poor who did not contribute for at least 20 years will help them with a minimum
(subsistence) income. As was said before, Brazil would have many people living under the poverty
line if there would not be any kind of social assistance. Therefore, some kind of anti-poverty program
is undoubtedly crucial. The minimum pension guarantee for participants who have contributed for
more than 20 years, as in Chile, is also possible. However, the linkage between the minimum pension
guarantee will have to change to prevent moral hazard behavior of the low income contributors,
which became a problem in Chile.
Another issue in Chile is the low coverage among the self-employed. Currently in Brazil the selfemployed are also not obliged to make contributions to the second pillar, but it would be advisable
to increase the coverage among this relatively large group (see Table 6.2). Tax incentives could work
to induce the self-employed to open an individual account and make regular contributions.
Lastly, many workers are currently working in the informal sector in Brazil and they usually do not
contribute to the pension system. The reform could help in lowering the informality, which happened
in Chile after the reform (Schmidt-Hebbel 1999). The reasoning is that employers no longer need to
make contributions as a percentage of payroll, this will lower the costs of labor for the employers. If
labor becomes cheaper, it becomes more attractive to create more jobs which gives informal-sector
workers a better chance at finding a formal job. One of the reasons for the high informality was that
many workers could not find a job in the formal sector. Another suggestion is to make working in the
rural areas more attractive, since another cause of the high informality was that too many workers
migrated from the rural areas to the urban areas, where there are not enough jobs for everyone.
Incentives to stay and work in the rural areas could be favorable tax treatment or a small bonus that
is received for as long as the worker stays in the rural area.
7.4
Winners and losers of the reform
Despite the (many) previously given benefits of reforming the Brazilian pension system in accordance
with the Chilean model, the Brazilian state has not yet implemented this recommendation. Possible
reasons could be that the government finds that the losses of the reform outbalance the gains or
that the losers have strong influential powers that prevent the government from executing the
reform.
Most likely the participants of the Special Regime, RJU, will suffer from the reform. Their current
generous benefits and favorable regulations will diminish after the reform, since the Chilean model
Page | 52
1
does not allow for differentiation between workers of the public or private regime. As the current
RJU is responsible for the largest share of the pension balance deficit, it is unlikely that the level of
benefits and regulations of this regime will be used for the entire work force after the reform. It can
thus be expected that the pension provision for the public workers will deteriorate, which is a reason
for the public workers to oppose to the reform. It seems reasonable that they would rather not like
to see the level of their retirement income fall and the eligibility criteria for receiving benefits
increased. Medici (2004) found that the active public workers and retirees embody approximately 6.4
million people and each as the ability to persuade two other individuals to not vote in favor of such a
reform, which results in nearly 20 million opponents of the reform. Furthermore, the author
continues that this group consists of many persons that have the capability to heavily influence the
public opinion, which makes the execution of the reform more unlikely.
Winners of the reform would predominately be the future generations and specifically the future
private workers. Future generations will no longer have to carry the burden that the ageing of the
society causes. Without the reform and taking into account that in the future there will be less
contributors (due to falling fertility rates) and more beneficiaries (because of rising life expectancies),
it would mean that the contributors would have to contribute a larger part of their income to
support the elderly. With the reform and the individual accounts, the ageing of the society no longer
affects the level of contributions. However, it is harder for future generations to voice their approval
of the reform, as they either do not exist yet or do not have voting power yet. This affects the
likelihood of implementing the reform adversely.
The reason that especially the future private workers will benefit from the reform, rather than the
future public workers is that public workers have higher benefits and do not have to contribute as
much as the private workers. As said before, the public workers will most likely enjoy less privileges,
lower benefits and higher eligibility criteria after the reform. It could therefore be questioned
whether the situation for the future public workers will improve.
Although possible reasons for not yet implementing the reform have been stated, it is suggested to
perform a more elaborate study on this topic.
8. Conclusion
The purpose of this paper was to analyze the Brazilian pension system. The pension system of Brazil
is of interest, since the country set itself apart from most of the other Latin American countries in
Page | 53
1
terms of reforming their pension system. While 11 Latin American countries chose to reform their
pension system, in the 1980s and 1990s, in accordance with the model of Chile, the pioneer in
(drastic) pension reforms, Brazil took a different path by continuing their PAYG system. However, the
situation in Brazil has come to a critical point where the sustainability of the system is questioned.
1
Among others, the demographic trends, the growing fiscal deficits and persistent income inequalities Page | 54
pose a threat on the sustainability of the PAYG system. This paper examined whether Brazil should
also reform its pension system like Chile, into a privately fully funded scheme.
In order to answer this question it was important to first examine the various options there are to
design a pension system and what their respective advantages and disadvantages are. Subsequently,
the reform of Chile was analyzed to describe the current situation and to indicate the positive and
negative effects of the reform. The positive effects could be seen as reasons of how the Chilean
model could improve the Brazilian situation, under the assumption that both countries face the same
pension problems before the reform. The negative effects should be used as a lesson for Brazil; to
avoid mistakes and to optimally use the reform to benefit the sustainability of the Brazilian pension
system.
The paper concludes that it is in Brazil’s best interest to reform its pension system into a privatized
fully funded system, like the one in Chile. Via the reform many of the current problems of Brazil will
be solved. The most important reason favoring the reform is that a fully funded system encounters
no problems of the ageing of the society, which is already a critical issue and will become an even
more fundamental problem if not dealt with appropriately. In addition, the too generous benefits
paid to workers in the public sector, that cause great budget deficits, will not exist in the new model.
Since the Chilean model does not differentiate between workers of different sectors, the benefits
received by Brazilian public workers will most likely be lower after the reform compared to the
current public worker’s benefits. The probable decline in benefits of the public workers, will most
likely result in the opposing to the reform from the public sector. Since the public sector still has
significant influence on the Brazilian government, this might be one of the reasons why the Brazilian
state has not yet decided to change her system. The area of winners and losers of the reform asks for
further research to give a more definitive reason why the government of Brazil has not reformed its
pension system into a fully funded one.
After concluding that Brazil should transform its pension system into the Chilean model, the paper
continues with giving suggestions on how this reform should be implemented. In most of the cases,
Brazil can directly copy the method of Chile since the countries are relatively alike. However some
small adjustments are necessary to fit Brazil’s characteristics better. For instance, Brazil should
provide more incentives to make it attractive for the self-employed to participate in the system. This
is a matter that is still rather problematic in Chile, but Brazil can learn from its and with the use of tax
incentive increase the attractiveness for the self-employed. On the other hand, the way of financing
the transition can be done similarly in Brazil. Both countries enjoyed budget surpluses before the
reform and have the opportunities to issue government bonds.
One final remark is that the transition and administration costs of the Chilean pension system ask for
further research as previous studies have been inconclusive. Some studies claimed that these costs
were too high, whereas others refuted these arguments (Rodriguez 1999). This paper assumed that
the transition and administration costs were not too high, but affordable. However, it is advised to
take a closer look at this matter, since it does influence the decision whether Brazil is able to
transform its pension system into a privatized fully funded system or not.
9. Reference list
Andrews, Emily S. 2006. Pension Reform and the Development of Pension Systems: An Evaluation of
World Bank Assistance. Working Paper, The World Bank, Washington D.C.
Arrau, Patricio, Klaus Schmidt-Hebbel. 1995. Pension System and Reform, Country Experiences and
Research Issues. Policy Research Working Paper, World Bank, Macroeconomics and Growth Division.
Baer, Werner, and Fialho Galvão Jr. 2006. Tax Burden, Government Expenditures and Income
Distribution in Brazil. Working Paper, University of Illinois.
Baeza, Sergio, and Raúl Bürger. 1995. Calidad de las Pensiones del Sistema Privado Chileno, in Sergio
Baeza and F. Margozzini, ed., Quince Anios Despues: Una Mirada al Sistema Privado de Pensiones,
Santiago: Centro de Estudios Publicos.
Banco Central do Brasil. 2009. Brazil Interest Rate. http://www.bcb.gov.br/?english Downloaded at
20th of July 2009.
Barreto de Oliveira, Francisco E., and Kaizô I. Beltrão. 2000. The Brazilian Social Security System.
Discussion Paper, Institute for Applied Economic Research, Rio de Janeiro.
Barrientos, Armando. 2002. “Comparing Pension Schemes in Chile, Singapore, Brazil and South
Africa.” Prepared for the UNRISD Meeting on Ageing, Development and Social Protection, Madrid,
2002.
Barrientos, Armando. 2003. What is the impact of non-contributory pensions on poverty? Estimates
from Brazil and South Africa. Working Paper, University of Manchester.
Page | 55
1
Barros, R.P, and Foguel, M.N. 2000. Focalização dos gastos públicos sociais e erradicação da pobreza
no Brasil. Working Paper. Intstitute of Applied Economic Research, Rio de Janeiro.
Besley, Timothy, and Robin Burgess. 2003. Halving Global Poverty. Journal of Economic Perspectives,
vol. 17, no. 3.
Blake, David, Douglas Wright, and Yumeng Zhang. 2008. Optimal Funding and Investment Strategies
in Defined Contribution Pension Plans under Epstein- Zin Utility. Working Paper, City University
London.
Blake, David. 2006. Pension Economics. Chichester: John Wiley & Sons Ltd.
Bodie, Zvi. 1990. Pensions as Retirement Income Insurance. Journal of Economic Literature, vol. 28,
no. 1, 28-49.
Bonturi, Marcos. 2002. The Brazilian Pension System: Recent Reforms and Challenges Ahead.
Working Paper, no. 340, OECD Economics Department.
Börsch-Supan, Axel, Alexander Ludwig, and Joachim Winter. 2005. Ageing, Pension Reform, and
Capital Flows: A Multi-Country Simulation Model. Working paper, Mannheim Research Institute for
Economics of Ageing Mannheim Germany, National Bureau of Economic Research Cambridge USA,
and University of Munich Germany.
Brooks, Sarah M. 2007. Globalization and Pension Reform in Latin America. Working Paper, Ohio
State University.
Cagan, Philip. 1965. The Effect of Pension Plans on Aggregate Savings: Evidence from a Sample
Survey. New York: Columbia University Press.
CIA World Factbook. 2008. Economic Indicators Brazil. https://www.cia.gov/library/publications/theworld-factbook/geos/br.html Downloaded at 20th of July.
Diamond, Peter. 1997. Insulation of Pensions from Political Risk, in Salvador Valdés-Prieto, ed., The
Economics of Pensions: Principles, Policies and International Experience, Cambridge: Cambridge
University Press.
Dorfman, Mark, Richard Hinz, and David Robalino. 2008. The Financial Crisis and Mandatory Pension
Systems in Developing Countries: Short- and Medium-term Responses. Working Paper, University of
Munich.
ERS USDA Data. 2008. International Macroeconomic Data Set.
http://www.ers.usda.gov/Data/Macroeconomics/ Downloaded at 20th of July 2009.
Feldstein, Martin. 1985. The Optimal Level of Social Security Benefits, Quarterly Journal of Economics
vol. 100, no.2, 303-320.
Feldstein, Martin. 1997. “Transition to Fully Funded Pension System: Five Economic Issues.”
Presented at the Annual Conference of the Kiel Institute of World Economics, Kiel, 1997.
Page | 56
1
Ferreira Savoia, José R. 2007. “Pension Reform in Brazil: The Challenge of Labor Inclusion.” Presented
at the 5th International Research Conference on Social Security, Warsaw, 5-7 March 2007.
Ferreira, Sergio G. 2005. Pension Reform in Brazil: Transitional Issues in a Model with Endogenous
Labor Supply. Discussion paper, IBMEC Business School Rio de Janeiro.
Gent, David F.T. 2001. Social Insurance: Theoretical Background. in Isabel Ortiz, ed., Social Protection
in Asia and the Pacific. Manila: Asian Development Bank.
Giambiagi, Fabio, and Lavínia Castro. 2003. Previdência social: diagnósticos e propostas de reforma.
BNDES, vol. 10, no. 19.
Gustman, Alan L., and Thomas L. Steinmeier. 1990. Pension Portability and Labor Mobility: Evidence
from the Survey of Income and Program Participation. Journal of Public Economics, vol. 50, 299-323.
Hakola, Tuulia, and Niku Määttänen. 2006. The Effect of the Pension Reform on Retirement Age and
Income Distribution: Estimates from a Dynamic Programming Model. Working Paper, Finnish Centre
for Pensions, The Research Institute of the Finnish Economy, Helsinki.
Hubbard, Glenn R., Jonathan Skinner, and Stephen P. Zeldes. 1994. Precautionary Saving and Social
Insurance. Journal of Political Economy, vol. 103, no. 2, 360-399.
Hviding, Ketil, and Marcel Mérette. 1998. Macroeconomic Effects of Pension Reforms in the Context
of Ageing Populations: Overlapping Generations Model Simulations for Seven OECD Countries.
Working Paper, no. 201, Economics Department OECD.
Iglesias, A., and R. Palacios. 2000. Managing Public Pension Reserves: A Review of the International
Experience. Working Paper, World Bank.
IMF. 2008. World Economic Outlook 2008. http://www.imf.org/external/index.htm Downloaded at
20th of July 2009.
Katona, George. 1964. Private Pensions and Individual Savings. Working Paper, University of
Michigan.
Kaufman, Bruce. 1998. Government Regulation of the Employment Relationship. Ithaca: IRL Press.
Medici, André. 2004. “The Political Economy of Reform in Brazil’s Civil Servant Pension Scheme.”
Presented at the International Symposium and Policy Seminar Pension Reform in the EnglishSpeaking Caribbean Countries, Barbados, 4-6 June 2003.
Melo, Marcus A. 2004. Institutional Choice and the Diffusion of Policy Paradigms: Brazil and the
Second Wave of Pension Reform. International Political Science Review, vol. 25, no. 3, 320-341.
Mesa-Lago, Carmelo. 2003. Reassessing Pension Reform in Chile and Other Countries in Latin
America. Working Paper, University of Pittsburgh.
Ministério da Fazenda. 2003. Política Econômica e Reformas Estruturais, Brasilia.
Ministério da Previdência Social. 2008. Brazilian Social Security Overview, Brasilia.
Page | 57
1
Ministério da Previdência Social. 2009. Social Security Statistical Bulletin.
http://www.previdencia.gov.br/arquivos/office/3_090625-100357-970.pdf Downloaded at 29th of
June 2009.
Mitchell, Olivia S., and Gary S. Fields. 1996. Designing Pension Systems for Developing Countries.
Working Paper, the Wharton School of the University of Pennsylvania.
Neri, M.C. 2002. Decent Work and the Informal Sector in Brazil. Working Paper. EPGE, Rio de Janeiro.
Pinheiro, Vinícius C. 2004. The Political Economy of Pension Reform in Brazil: A Historical Perspective.
Working Paper. Inter American Development Bank, Washington DC.
Poterba, James M. 1996. Personal Saving Behavior and Retirement Income Modeling: A Research
Assessment, in Eric A. Hanushek and Nancy L. Maritato, eds., Assessing Knowledge of Retirement
Behavior. Washington D.C.: National Academy Press.
Rodriguez, L. 1999. Chile’s Private Pension System at 18: Its Current State and Future Challenges.
Working Paper, The Cato Project.
Roncada, Ana L.C. 2000. Reforming Old-Age Pension Systems in Developing Countries: Lessons from
Latin America. Brazilian Journal of Political Economy, vol. 20, no. 1, 119-137.
Rothschild, Michael, and Joseph Stiglitz. 1976. Equilibrium in Competitive Insurance Markets: An
Essay on the Economics of Imperfect Information. Quarterly Journal of Economics, vol. 90, 629-650.
Ruiz-Tagle, Joaquin. 1997. The Chilean Pension System. Working Paper, OECD.
Rutkowski, Michal. 2002. Key Issues in Debates on Modern Pension Systems. Working Paper (draft).
World Bank.
Schmidt-Hebbel, Klaus. 1999. Chile’s Pension Revolution Coming of Age. Working Paper, Deutsches
Institut für Altersvorsorge, Köhl.
Sinha, Tapen. 2000. Pension Reform in Latin America and its Lessons for Policymakers. Boston: Kluwer
Academic Publishers.
Studart, Rogério. 2000. Pension Funds and the Financing Productive Investment: An Analysis Based
on Brazil’s Recent Experience. Working Paper, CEPAL, Santiago.
Thaler, Richard. 1994. Psychology and Savings Policies. American Economic Review, vol. 84, no. 2,
186-192.
Thompson, Lawrence H. 2001. Operation of Pension Systems: Public or Private, in Isabel Ortiz, ed.,
Social Protection in Asia and the Pacific. Manila: Asian Development Bank.
Turner, Adair. 2006. Pension Challenges in an Aging World. IMF’s Quarterly Magazine Finance and
Development, vol. 43, no. 3.
Ulyssea, Gabriel. 2005. Labor Market Informality in Brazil: A Literature Survey. Working Paper,
Institute of Applied Economic Research, Rio de Janeiro.
Page | 58
1
United Nations. 2007. Development in an Ageing World: Advance Planning Needed to Adapt to
Ageing Populations. UN Report, Department Economic and Social Affairs, UN.
United Nations. 2008. World Population Prospects 1950-2050.
http://esa.un.org/unpp/index.asp?panel=2 Downloaded at 29th of June 2009.
Whitehouse, Edward. 2007. Pension Panorama: Retirement-Income Systems in 53 Countries. The
World Bank, Washington D.C.
World Bank. 1994. Averting the Old Age Crisis: Policies to Protect the Old and Promote Growth. New
York: Oxford University Press.
World Bank. 2001. Social Protection Sector Strategy: From Safety Net to Springboard. The
International Bank for Reconstruction and Development, The World Bank.
Yadav, J.P. 2004. Aged in India: The Struggle to Survive. New Delhi: Anmol Publications.
Yahoo Finance. 2009. BOVESPA stock returns.
http://finance.yahoo.com/q/hp?s=%5EBVSP&a=00&b=01&c=1999&d=06&e=24&f=2009&g=m
Downloaded at 20th of July 2009.
Page | 59
1