2024 has been a key year for watching the discussions taking place on the viability of the current pension systems in Latin America. In Colombia and Peru the corresponding debates are the order of the day and in certain other countries, such as Mexico and Uruguay, where reforms have already been implemented, the results of such are already beginning to be seen.

By Valora Analitik for GRUPO SURA*.

Pension systems in Latin America are facing significant challenges for ensuring their long-term sustainability. In 2024, several countries in the region, including Colombia and Peru, where pension reforms were recently approved, and in others, such as Mexico and Uruguay, where their implementation is already underway, are still discussing their effects and future viability.

This wave of reforms throughout the region responds, among other issues, to demographic factors, particularly the changes in the population over 60 years of age between 1950 and 2100. In 1950, only 5% of the population of Latin America was over 60 years of age, but today this figure reaches almost 10% of the population, and by 2100 it is expected to exceed 35%, according to a study by the International Federation of Pension Fund Administrators (FIAP its abbreviation in Spanish). This means that, out of every 100 citizens in the region by the year 2100, 35 will be over 60 years of age, thereby suggesting the need to implement reforms for upholding the sustainability of these systems in the future.

Alice Gutiérrez, Latin America director of SURA Asset Management's Savings and Retirement line of business, explains that the importance of discussing these issues lies in the need to bring to the debate the ability to build long-term savings as "a collaboration between the State, the companies, the individual and the Pension Funds as managers of these resources".

At the same time, she emphasized the fact that the reforms that have been approved and implemented in each of the countries open up opportunities to set goals together with each individual so that they can effectively achieve a decent pension in the future.

On the other hand, the Chairman of the International Federation of Pension Fund Administrators (FIAP its abbreviation in Spanish), Guillermo Arthur, has expressed his concern regarding the effects that the high level of labor informality in Latin America is having on the financing of pensions: "60% of those over 65 years of age do not receive a contributory pension in Latin America. Hence, we are exploring tools to mitigate the corresponding impact on pensions".

Likewise, experts agree on the need to increase coverage, make parametric adjustments, diversify sources of funding and encourage voluntary pension savings. Financial education and administrative efficiencies also play a vital role in the sustainability of the pension systems.

Key points regarding pension reforms in Latin America

Against this backdrop and given the discussions taking place in several countries throughout the region, the pension reforms that have been approved and implemented so far are progressing as follows:

Mexico

Before the end of its term, the Government of Andrés Manuel López Obrador achieved the approval of a new pension reform that contemplated the creation of the Welfare Pension Fund, an initiative aimed at collecting funds from the retirement accounts of those over 70 years of age that have not been claimed.

This fund proposes reforms to the Social Security Law, the Law of the Retirement Savings System, the Law of the National Workers' Housing Fund Institute and the Law of the Institute of Security and Social Services for State Workers. Its purpose is to guarantee access to a decent pension for adults over 65 years of age who began contributing to Social Security after 1997, when the current pension legislation came into effect.

Therefore, this proposal seeks to grant a pension equal to 100% of the pensioner's last monthly salary, with a ceiling of the average salary registered with the IMSS, the Mexican Institute of Social Security, which is just over USD 987.

Since 1997, Mexican pensions have been in the charge of the private fund management system known as 'Afore'. The reform in question is aimed at transferring just over USD 2 billion to the Welfare Pension Fund, money from the unclaimed retirement accounts of workers aged 70 and over, which has led to a certain amount of criticism of this initiative.

Uruguay

This country´s reform, implemented at the end of 2022, achieved a balance between the pay-as-you-go and individually funded systems, resulting in replacement rates of 60% and more. At the same time, it increased the minimum retirement age from 60 to 65 (with two specific exceptions), in order to contain public spending on pensions.

At the present time, out of the 15% of the wages that workers contribute to the pension system, 7.5% goes to the BPS (the Social Security Bank) and 7.5% to the AFAPs (the Pension Savings Fund Management firms). With the change approved through this reform, 10% goes to the BPS or the Social Security Bank and the remaining 5% to the Pension Fund Management firms.

As of the date of this reform, the best 20 years will also be taken into account for calculating the corresponding equation (instead of the previous formula: whichever is more convenient between the average of the best 20 years and the average of the last 10 years). This number was reached after lengthy negotiations, given that the government's initial proposal was to take 25 years.

The case of Uruguay is well appreciated among pension reform proposals in Latin America because it highlights the importance of a collaboration between the State, individuals, companies and pension fund management firms.

Colombia

After more than 10 sessions of debate in the plenary sessions of both chambers of Congress, that is to say the Senate and the House of Representatives, and its subsequent conciliation, the pension reform presented by the government of Gustavo Petro was approved and with the horizon of July 1, 2025 as its effective date.

In spite of the doubts left after approving this reform in terms of procedure and substance, the government has explained that the reform will benefit close to 19 million workers while providing resources to three million senior citizens at or below the poverty line. For their part, unions and private funds claim that, although progress is being made in terms of coverage, the project affects workers' savings.

Among the main changes approved with the pension reform in Colombia, the proposed pillars are highlighted, these summarized as follows:

1. Contributory pillar

• Minimum age: 57 years for women and 62 years for men.
• Qualifying weeks: 1,300 for men and in the case of women, these shall be gradually reduced by 25 weeks each year, until reaching 1,000 in 2036.
• Wage ceiling: all persons earning up to 2.3 times the Monthly Legal Minimum Wage will contribute to the Average Premium Component; those earning more than 2.3 times the Monthly Legal Minimum Wage will contribute to the complementary individual savings component, i.e. the private fund of their choice.
• Sources of financing: Mutual Old Age Fund and Savings Fund managed by Colombia´s Central Bank.

2. Semi-contributory pillar

• Minimum age: 60 years for women and 65 years for men.
• Qualifying weeks: less than 1,000 weeks, those who contributed less than 300 weeks may request a substitute indemnity; those who contributed between 300 and 1,000 weeks will receive an annuity and a subsidy to their contributions; those who have an income of less than 1 Monthly Legal Minimum Wage and make contributions to the BEPS (Periodic Economic Benefits) program will receive an annuity that may not exceed 80% of one Monthly Legal Minimum Wage and a subsidy to their contributions.
• Sources of financing: Colombia´s General National Budget, the Mutual Old Age Fund, the BEPS Fund and the Solidarity Sub-account.

3. Solidarity pillar

• Minimum age: 60 years of age for women and 65 years of age for men; in the case of persons with a work disability equal to or greater than 50%, the age threshold will be 55 years of age for men and 50 years of age for women.
• These shall receive a basic income based on the 2023 poverty line as certified by the Colombian Statistics Bureau, (DANE) plus the CPI updated each year.
• Sources of financing: Subsistence sub-account of the Solidarity Fund and Colombia´s General National Budget,.

4. Voluntary savings pillar

• Voluntary contributions according to the member's ability to pay remain unchanged and will continue to be managed by private funds.

Peru

As in Colombia, the Peruvian Congress approved in June a pension reform proposed by Dina Boluarte’s government, which has not been without controversy.

This pension reform seeks to require self-employed workers who receive income that constitutes fourth or fifth category income to make mandatory contributions to their pension fund, with a contribution rate starting at 2% and increasing every two years up to 5%.

It would also allow more competitors to manage pension funds in order to improve the system´s profitability, with the possibility of achieving individual savings in banks, savings and loan associations, finance companies, insurance companies, among others.

For those who are 40 years of age or older, at the time the law comes into effect, these shall be given the possibility of withdrawing up to 95.5% of their funds upon retirement, while people younger than this age would not have that option, since, according to the government, this is done to guarantee sufficient savings for their retirement at the right age. Thus, the reform in question prohibits any extraordinary withdrawals of the funds accumulated in the individual accounts containing mandatory contributions during the active stage

Chile

The reform proposed by Gabriel Boric did not achieve consensus due to its technical complexity and country-wide politicization of the issue at hand. The corresponding proposal was aimed at increasing contributions to individual accounts and reintroduce the pay-as-you-go system, but lack of agreement on contribution percentages has prevented this from moving forward.

Against this backdrop, pension reforms in Latin America still face many challenges to ensure the sustainability and fairness of pension systems in a region characterized by marked demographic and economic inequalities.

For this reason, collaboration between governments, the private sector and international organizations will be key to meeting these challenges and building more robust and resilient pension systems.

*This article was prepared by the Valora Analitik staff for Grupo SURA. Its content is of a purely journalistic nature and does not compromise any specific positions taken or recommendations made by our Organization.