Informality and the Challenge of Pension Adequacy

Abstract

Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.

The expected impact of the 2019 Brazilian pension reform on survivors’ pensions

“…Four individual pension indicators were calculated. These indicators are widely used (Freudenberg and Toscani, 2019; Geanakoplos, Mitchell and Zeldes, 1999; OECD, 2021). With these indicators, it is possible to analyse the adequacy and intragenerational equity of social security benefits (Domonkos and Simonovits, 2017; Shuls and Tipping, 2020).…”

“…Four individual pension indicators were calculated. These indicators are widely used (Freudenberg and Toscani, 2019;Geanakoplos, Mitchell and Zeldes, 1999; 1. A deferred reversionary annuity is the actuarial term used for an annuity paid when a surviving spouse receives a guaranteed lifetime income after the insured spouse dies.…”

The pension system in Peru: Parallels and intersections

“…We then outline a conceptual framework that helps explain the reasons why an increase in the competitiveness of the Peruvian pension system might not have been enough to increase the ACR. The conceptual framework incorporates the findings of an extensive body of literature that has analyzed pension system reforms in Latin America and Peru (Bernal, 2016; Freudenberg & Toscani, 2019; Garay, 2016; Madrid, 2000, 2002, 2005; Mesa‐Lago, 2016; Olivera, 2016b; Weyland, 2005). We argue that “re‐reforms” can affect the supply side of pension services.…”

“…What factors might shift the supply outward, in a parallel fashion? Freudenberg and Toscani (2019) suggest, for example, that introducing flexibility to the minimum contribution period in the ONP could shift supply to the right. Mesa‐Lago (2016), the OECD (2019), and Olivera (2016a) have recommended an integrated pension system that includes a defined benefit pillar which would increase the scale of the pension industry.…”