Changing Social Security in Latin America: Toward Alleviating the Social Costs of Economic Reform 9781685858803

Citation preview

Changing Social Security in Latin America

Changing Social Security in Latin America Toward Alleviating the Social Costs of Economic Reform

Carmelo Mesa-Lago

Lynne Rienner Publishers • Boulder & London

Published in the United States of America in 1994 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London W C 2 E 8LU © 1994 by Lynne Rienner Publishers, Inc. All rights reserved Library of C o n g r e s s Cataloging-in-Publication Data M e s a - L a g o , Carmelo, 1 9 3 4 C h a n g i n g social security in Latin A m e r i c a : t o w a r d alleviating the social costs of e c o n o m i c reform / C a r m e l o M e s a - L a g o . Includes bibliographical references and index. ISBN 1 - 5 5 5 8 7 - 4 8 6 - X 1. Social s e c u r i t y — L a t i n America. 2. Structural a d j u s t m e n t ( E c o n o m i c p o l i c y ) — L a t i n America. I. Title. HD7130.5.M445 1994 368.4'0098—dc20 93-38662 CIP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

©

The paper used in this publication meets the r e q u i r e m e n t s of the American National Standard for P e r m a n e n c e of Paper for Printed Library Materials Z 3 9 . 4 8 - 1 9 8 4 .

Contents

List of Tables Preface 1

vii ix

The Economic Crisis, Restructuring and Adjustment, and Social Costs

1

The Antecedents and Implementation of the Economic Reform, 1 The Policies of Economic Reform and Their Effects, 3 The Deterioration of the Socioeconomic Conditions in L A C from 1980 to 1990, 8

2

Social Security: The Problems of Coping with Social Costs

15

Historical and Evolutionary Framework, 15 Major Problems Faced by Social Security, 19 The Social Security Crisis and the Need to Change the System, 85

3

Changing Social Security: Case Studies of Reform, Privatization, and Universalization Trends and Types of Reform, 89 Costa Rica: A Reformed Public S c h e m e with Universal Coverage, 95 Mexico: A Public Scheme Extended to Rural Areas, 101 Jamaica: A Universal Public Scheme with Marginal Privatization in Health Care, 106 Chile: Pioneer and Model of Privatization, 115 Peru: Moving Closer to the Chilean Model, 133 Colombia: Mixed or Private Scheme? 136 Argentina: A Mixed Model, 149 Uruguay: The Reform of the Prototypical Welfare State, 155

V

89

vi

4

CONTENTS

T h e F u t u r e R o l e of S o c i a l S e c u r i t y in A l l e v i a t i n g t h e Social Costs of A d j u s t m e n t and Restructuring

169

R e d e f i n i n g the R o l e s of the Principal A c t o r s , 169 E x t e n d i n g Social S e c u r i t y C o v e r a g e W i t h i n the P r o c e s s of A d j u s t m e n t / R e s t r u c t u r i n g , 180 O t h e r M e a s u r e s to A l l e v i a t e the I m p a c t of the A d j u s t m e n t / R e s t r u c t u r i n g Process, 185

Notes

193

Bibliography

195

Index About

205 the Book

and

the Author

213

List of Tables

1.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13

2.14 2.15 2.16

E f f e c t s of the E c o n o m i c Crisis, A d j u s t m e n t , and R e s t r u c t u r i n g in L A C Historical Inception of Social Security P r o g r a m s in L A C G r o u p s of W o r k e r s Not Legally C o v e r e d by Social I n s u r a n c e in L A C Total a n d E c o n o m i c a l l y A c t i v e P o p u l a t i o n C o v e r e d by Social S e c u r i t y in L A C C o v e r a g e of the Informal S e c t o r by Social I n s u r a n c e in S e l e c t e d C o u n t r i e s of L A C F e a t u r e s of U n e m p l o y m e n t I n s u r a n c e / A s s i s t a n c e P r o g r a m s in L A C Social I n s u r a n c e and Public A s s i s t a n c e P e n s i o n P r o g r a m s in S e l e c t e d C o u n t r i e s of L A C C o n t r i b u t i o n s to Social Security in L A C P e r c e n t a g e Distribution of Social I n s u r a n c e Plus F a m i l y A l l o w a n c e s R e v e n u e by S o u r c e s in L A C P e r c e n t a g e of Social Insurance Plus F a m i l y A l l o w a n c e s R e v e n u e G e n e r a t e d by I n v e s t m e n t R e t u r n s in L A C P e r c e n t a g e Distribution of B e n e f i t E x p e n d i t u r e s f o r Social I n s u r a n c e and Family A l l o w a n c e s in L A C I n d i c e s of A n n u a l A v e r a g e Social Security B e n e f i t s

10 16 21 22 24 30 38 40 42 46 53

E x p e n d i t u r e per Capita in L A C Real V a l u e s of P e n s i o n s in S e l e c t e d C o u n t r i e s of L A C P e r c e n t a g e Distribution of P o p u l a t i o n C o v e r a g e a n d R e v e n u e in the Ministries of Health and Social I n s u r a n c e S y s t e m s f o r S e l e c t e d Latin A m e r i c a n C o u n t r i e s I n d i c a t o r s of Hospital E f f i c i e n c y f o r Social I n s u r a n c e in S e l e c t e d Latin A m e r i c a n C o u n t r i e s

59 61

A d m i n i s t r a t i v e E x p e n d i t u r e s f o r Social S e c u r i t y in L A C Social Security S y s t e m E x p e n d i t u r e s as P e r c e n t a g e of G D P in L A C

73

vii

65 72

82

viii

LIST OF TABLES

2.17

S u r p l u s e s or D e f i c i t s of Social Security S y s t e m s as

3.1

P e r c e n t a g e of G D P in L A C Liberal P e n s i o n s and Heavy C o s t s in U r u g u a y

83 159

Preface

T h e e c o n o m i c c r i s i s of t h e 1 9 8 0 s in L a t i n A m e r i c a a n d t h e C a r i b b e a n ( L A C ) w a s the w o r s t s i n c e the G r e a t D e p r e s s i o n a n d h a l t e d d e v e l o p m e n t f o r a d e c a d e . T h e m a g n i t u d e of t h e d e b t c r i s i s w a s c o m p o u n d e d by t h e p r o c e s s of e c o n o m i c r e f o r m ( a d j u s t m e n t a n d r e s t r u c t u r i n g ) that s e v e r a l L A C c o u n t r i e s i n t r o d u c e d at t h e t i m e ( C h i l e s t a r t e d t h e p r o c e s s in t h e 1 9 7 0 s ) . I d i s t i n g u i s h h e r e b e t w e e n t h e t w o p o l i c y i n s t r u m e n t s of t h e ref o r m : adjustment r e f e r s to s h o r t - t e r m m e a s u r e s g e a r e d to t h e r e d u c t i o n of d o m e s t i c d i s e q u i l i b r i u m , w h e r e a s restructuring p e r t a i n s to m e d i u m - a n d l o n g - r u n p o l i c i e s that a i m at a c h a n g e in d e v e l o p m e n t s t r a t e g y ( f r o m inw a r d to o u t w a r d o r i e n t e d ) , i n c r e a s e in d o m e s t i c a n d i n t e r n a t i o n a l c o m p e tition, p r i v a t i z a t i o n , and d e r e g u l a t i o n . By 1 9 9 3 m o s t L A C c o u n t r i e s h a d i n t r o d u c e d a d j u s t m e n t p r o g r a m s , b u t t h e m a j o r i t y still f a c e d t h e r e s t r u c turing process. T h e e c o n o m i c crisis and r e f o r m h a v e had s e v e r e social c o s t s that h a v e a f f l i c t e d a c o n s i d e r a b l e s e g m e n t of t h e p o p u l a t i o n . T h e s e c o s t s i n c l u d e an i n c r e a s e in o p e n u n e m p l o y m e n t , a d e c l i n e in real w a g e s , a r e d u c t i o n in social s e r v i c e s , t h e e l i m i n a t i o n o r r e d u c t i o n of s u b s i d i e s f o r c o n s u m e r g o o d s , rising p r i c e s , and h i g h e r t a x e s , m o s t l y of a r e g r e s s i v e n a t u r e . O v e r all t h e m a i n n e g a t i v e o u t c o m e s h a v e b e e n an e x p a n s i o n of p o v e r t y in t h e r e g i o n a n d d e t e r i o r a t i o n in s o c i a l p r o t e c t i o n . T h e b u r d e n of s o c i a l c o s t s h a s not b e e n e q u a l l y d i s t r i b u t e d a c r o s s s o c i e t y , b u t h a s p a r t i c u l a r l y h a r m e d l a b o r a n d the l o w e s t i n c o m e s t r a t a . S o far the l o n g - t e r m o u t c o m e s of e c o n o m i c r e f o r m a p p e a r to be p o s itive in m o s t c o u n t r i e s that h a v e t h o r o u g h l y i m p l e m e n t e d it: t o g e t h e r with an e c o n o m i c r e c o v e r y and stability, t h e r e h a s b e e n an i m p r o v e m e n t in social i n d i c a t o r s , w h i c h in a f e w c o u n t r i e s h a v e r e c u p e r a t e d o r s u r p a s s e d the l e v e l s of 1980. B u t such p o s i t i v e r e s u l t s d o not j u s t i f y the u n e q u a l distrib u t i o n of the b u r d e n ; c o m p e n s a t o r y p o l i c i e s a r e still r e q u i r e d to p r o t e c t the most vulnerable groups during the transition. T h e r e have been varying l e n g t h s of t i m e f o r the t r a n s i t i o n s a n d d i v e r s e a p p r o a c h e s to social c o s t s .

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T o a l l e v i a t e t h e h a r d s h i p s o m e c o u n t r i e s h a v e i m p l e m e n t e d s u c h ad h o c p o l i c i e s as s a f e t y nets, t a r g e t i n g of the m o s t v u l n e r a b l e g r o u p s , a n d social p a c t s to a c h i e v e a m o r e e q u i t a b l e d i s t r i b u t i o n of t h e b u r d e n a n d t h e e v e n tual f r u i t s of e c o n o m i c r e c o v e r y . B e c a u s e m o s t L A C c o u n t r i e s still h a v e to u n d e r g o the r e s t r u c t u r i n g p r o c e s s , t h e h a n d l i n g of social c o s t s a n d c o m p e n s a t o r y p o l i c i e s w i l l b e c o m e e v e n m o r e i m p o r t a n t in t h e rest of the 1 9 9 0 s , a p o i n t n o w s t r e s s e d by s e v e r a l i n t e r n a t i o n a l a n d r e g i o n a l l e n d i n g a n d d e v e l o p m e n t a g e n c i e s . T h e d e m o c r a t i z a t i o n p r o c e s s in L A C , if it c o n t i n u e s , s u g g e s t s that m o d e r a t e a n d s o c i a l - c o s t - c o n s c i o u s a p p r o a c h e s will p r e v a i l in the f u t u r e . S o c i a l s e c u r i t y s h o u l d play a c r u c i a l r o l e in c o m p e n s a t i n g f o r the social c o s t s of e c o n o m i c r e f o r m . It b r o a d l y e m b r a c e s a v a r i e t y of p r o g r a m s d e s i g n e d to h e l p i n d i v i d u a l s c o p e w i t h s o c i a l r i s k s that a f f e c t the i n c o m e a n d h e a l t h of the l a b o r f o r c e a n d the p o p u l a t i o n as a w h o l e — s u c h as o l d age, disability, death, c o m m o n sickness, maternity, occupational hazards, a n d u n e m p l o y m e n t . S p e c i f i c p r o g r a m s a r e ( 1 ) s o c i a l i n s u r a n c e s , w h i c h inc l u d e pensions for retirement, disability, and survivors; m o n e t a r y and m e d i c a l c a r e in c a s e of c o m m o n s i c k n e s s a n d m a t e r n i t y ; s i m i l a r b e n e f i t s for occupational accidents and diseases; unemployment compensation; a n d f a m i l y a l l o w a n c e s ; ( 2 ) p u b l i c a s s i s t a n c e f o r t h e s e g m e n t of t h e p o p u lation not c o v e r e d by social i n s u r a n c e s ; a n d (3) p u b l i c health a n d o t h e r s o cial s e r v i c e s . T h e o r e t i c a l l y all these p r o g r a m s s h o u l d be c o o r d i n a t e d or int e g r a t e d to p r o v i d e u n i v e r s a l p r o t e c t i o n to t h e p o p u l a t i o n a n d s h o u l d b e c o u n t e r c y c l i c a l , i.e., e x p a n d in t i m e s of e c o n o m i c r e c e s s i o n . Unfortunately, f e w countries in L A C have developed an all-encompassing s o c i a l s e c u r i t y u m b r e l l a ; m o s t of t h e m c o v e r o n l y a m i n o r i t y of t h e p o p u lation t h r o u g h s o m e social i n s u r a n c e s that a r e not n o r m a l l y i n t e g r a t e d , and even fewer countries provide interconnected public assistance and health p r o g r a m s to assist t h e n o n i n s u r e d m a j o r i t y . T h e o l d e s t , m o s t a d v a n c e d soc i a l s e c u r i t y s y s t e m s in t h e r e g i o n b e g a n to s u f f e r s e r i o u s f i n a n c i a l a n d a d m i n i s t r a t i v e p r o b l e m s in the 1 9 6 0 s a n d 1 9 7 0 s t h a t b e c a m e a g g r a v a t e d b y the e c o n o m i c c r i s i s of the 1 9 8 0 s . T h e r e s u l t w a s a d e c l i n e in r e v e n u e s a n d a r i s e in e x p e n d i t u r e s that w o r s e n e d t h e f i n a n c i a l d i s e q u i l i b r i u m of t h e social s e c u r i t y s y s t e m . E v e n t u a l l y t h e s e p r o b l e m s b e c a m e w i d e s p r e a d in t h e r e g i o n , a n d by t h e early 1 9 9 0 s t h e r e w a s a s o c i a l s e c u r i t y c r i s i s in most L A C countries. T h e s t r u c t u r a l l i m i t a t i o n s of t h e s e s y s t e m s , c o m p o u n d e d by the w o r s e n i n g m a c r o e c o n o m i c e n v i r o n m e n t in t h e 1 9 8 0 s , m a d e s o c i a l s e c u r i t y inc a p a b l e of a l l e v i a t i n g the social d i s t r e s s d e r i v e d f r o m t h e e c o n o m i c c r i s i s a n d t h e r e f o r m . F o r i n s t a n c e , n e i t h e r t h e i n c r e a s i n g n u m b e r of u n e m p l o y e d a n d i n f o r m a l w o r k e r s n o r t h e p o o r h a v e f o u n d p r o t e c t i o n in t h e c u r r e n t s y s t e m , b e c a u s e s o c i a l i n s u r a n c e d o e s not n o r m a l l y c o v e r t h e s e g r o u p s and b e c a u s e p u b l i c a s s i s t a n c e a n d p u b l i c h e a l t h p r o g r a m s w e r e c u t as p a r t of t h e a d j u s t m e n t p o l i c y . F u r t h e r m o r e , t h e s y s t e m s f a c e g r o w i n g

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Xi

f i n a n c i a l d e f i c i t s b e c a u s e of d e c l i n i n g p a y r o l l c o n t r i b u t i o n s , n e g a t i v e investment yields, and increasing evasion, p a y m e n t delays, and state debt. T o c o p e w i t h d e f i c i t s m a n y social s e c u r i t y s y s t e m s a l l o w e d a d e t e r i o r a t i o n in b o t h the real v a l u e of their p e n s i o n s a n d t h e q u a l i t y of their h e a l t h - c a r e s e r v i c e s . A s a result, the m i n o r i t y c o v e r e d b y s o c i a l i n s u r a n c e b e g a n to s u f f e r social c o s t s , too. At the b e g i n n i n g of the 1990s t h e p r e s s u r e f r o m i n t e r n a t i o n a l l e n d i n g a g e n c i e s , the f i n a n c i a l l i m i t a t i o n s i m p o s e d on g o v e r n m e n t s , a n d t h e s u c c e s s of t h e C h i l e a n r e f o r m m o d e l — a p i o n e e r of p r i v a t i z a t i o n — l e d to a g r o w i n g m o v e m e n t of social s e c u r i t y r e f o r m in the r e g i o n . T h e r e is little d o u b t that the s y s t e m will c h a n g e ; the q u e s t i o n is w h i c h m o d e l w i l l p r e vail: the c o n t i n u a t i o n of a p u b l i c social s e c u r i t y p r o g r a m ( a l t h o u g h m o d i f i e d in key a s p e c t s ) , p r i v a t i z a t i o n , or a m i x e d m o d e l c o m b i n i n g e l e m e n t s of b o t h . T h e r e f o r m s h o u l d a l s o h e l p m a k e s o c i a l s e c u r i t y (or a l t e r n a t i v e i n s t i t u t i o n s ) b e t t e r able to c o p e with t h e social c o s t s of e c o n o m i c r e f o r m . T h i s b o o k f o c u s e s on the p r o c e s s of social security r e f o r m in t e r m s of the e c o n o m i c crisis, a d j u s t m e n t / r e s t r u c t u r i n g , and the n e e d to c o p e with s o cial c o s t s . It d o e s not break n e w g r o u n d o n the p r o c e s s of e c o n o m i c r e f o r m a n d its social e f f e c t s , but it p r o v i d e s a g e n e r a l r e v i e w of t h e s e issues as a b a s e f o r a n a l y z i n g the social security crisis a n d its o n g o i n g t r a n s f o r m a t i o n . C h a p t e r 1 s u m m a r i z e s the d e b t c r i s i s , d e s c r i b e s the p o l i c i e s of a d j u s t m e n t / r e s t r u c t u r i n g , and m e a s u r e s social c o s t s a c c o r d i n g to a s e r i e s of statistical i n d i c a t o r s . E x a m p l e s are d r a w n f r o m a n u m b e r of L A C c o u n t r i e s . C h a p t e r 2 a n a l y z e s the p r o b l e m s f a c e d by social s e c u r i t y p r i o r to t h e e c o n o m i c c r i s i s a n d r e f o r m of t h e 1 9 8 0 s a n d h o w t h e c r i s i s a g g r a v a t e d t h o s e p r o b l e m s . S p e c i f i c i s s u e s d i s c u s s e d in this c h a p t e r are l o w p o p u l a tion c o v e r a g e a n d the d i f f i c u l t i e s of e x t e n d i n g p r o t e c t i o n to v u l n e r a b l e g r o u p s s u c h as i n f o r m a l , rural, and u n e m p l o y e d w o r k e r s ; high a n d r e g r e s sive payroll contributions, noncompliance, and poor investment yields; g e n e r o u s b e n e f i t s and e n t i t l e m e n t c o n d i t i o n s that e v e n t u a l l y h a d to be c u t ; i n c r e a s i n g c o s t s of health c a r e ; e x c e s s i v e a d m i n i s t r a t i v e e x p e n d i t u r e s ; a n d w o r s e n i n g d i s e q u i l i b r i a of the s y s t e m s . C h a p t e r 3 first e l a b o r a t e s a t y p o l o g y of r e f o r m m o d e l s in b o t h p e n s i o n a n d h e a l t h - c a r e p r o g r a m s a n d then s t u d i e s in d e p t h t h e v a r i o u s t y p e s of r e f o r m s in eight c o u n t r i e s : A r g e n t i n a , C h i l e , C o l o m b i a , C o s t a R i c a , J a m a i c a , M e x i c o , P e r u , and U r u g u a y . The final chapter extracts lessons f r o m the case studies, evaluates the result of t h e C h i l e a n m o d e l of p r i v a t i z a t i o n a n d its r e p l i c a b i l i t y in t h e rest of L A C , a n d p r o v i d e s r e c o m m e n d a t i o n s in t h r e e a r e a s : ( 1 ) r e d e f i n i t i o n of t h e roles of the principal social s e c u r i t y a c t o r s ( t h e s t a t e , t h e p r i v a t e s e c tor, and i n t e r m e d i a t e b o d i e s ) ; ( 2 ) a v e n u e s f o r e x p a n d i n g c o v e r a g e to t h e i n f o r m a l a n d rural s e c t o r s a n d w a y s to c o p e w i t h u n e m p l o y m e n t ; a n d ( 3 ) m e a s u r e s n e e d e d to e n s u r e f i n a n c i a l l y v i a b l e social s e c u r i t y s y s t e m s in t h e future.

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T h e initial v e r s i o n of this s t u d y w a s p r e p a r e d f o r the S o c i a l S e c u r i t y D e p a r t m e n t of t h e I n t e r n a t i o n a l L a b o u r O f f i c e ( I L O ) in G e n e v a a n d c o m p l e t e d at the e n d of 1 9 9 1 . A t h o r o u g h r e v i s i o n a n d u p d a t i n g of the m a n u s c r i p t ( p a r t i c u l a r l y o n t h e c r u c i a l C h a p t e r 3) w a s u n d e r t a k e n o n e year later. A third v e r s i o n w a s c o m p l e t e d in m i d - 1 9 9 3 in r e s p o n s e to v a l u a b l e c r i t i c i s m a n d s u g g e s t i o n s f r o m an a n o n y m o u s r e f e r e e f o r L y n n e R i e n n e r P u b l i s h e r s . T h e I L O p r o v i d e d c o p i o u s i n f o r m a t i o n to p r e p a r e the first v e r s i o n a n d g r a c i o u s l y a u t h o r i z e d t h e p u b l i c a t i o n of t h e s t u d y , b u t it is not r e s p o n s i b l e f o r its c o n t e n t and v i e w s . T h e s t u d y a l s o b e n e f i t e d , in its v a r i o u s s t a g e s , f r o m a s a b b a t i c a l l e a v e g r a n t e d b y t h e U n i v e r s i t y of Pittsb u r g h f o r 1 9 9 0 - 1 9 9 1 ; an A l e x a n d e r v o n H u m b o l d t S t i f t u n g S e n i o r R e s e a r c h P r i z e a n d the s u p p o r t of the M a x - P l a n c k Institut f ü r A u s l ä n d i s c h e s und I n t e r n a t i o n a l e s S o z i a l r e t c h , b o t h f o r 1 9 9 1 - 1 9 9 2 ; my p a r t i c i p a t i o n in the I n t e r n a t i o n a l C o n f e r e n c e on S o c i a l S e c u r i t y R e f o r m o r g a n i z e d by the Institute of t h e A m e r i c a s in 1993; a n d r e s e a r c h t r i p s to A r g e n t i n a , C h i l e , C o l o m b i a , E c u a d o r , a n d M e x i c o f r o m 1 9 9 0 - 1 9 9 3 , c o n d u c t e d as part of c o n s u l t a n t s h i p s w i t h U S A I D , U N D P , t h e I n t e r - A m e r i c a n F o u n d a t i o n , the Inter-American D e v e l o p m e n t Bank, the Friedrich-Ebert Stiftung, and CIEDESS-Chile. My research assistant, Rafael T a m a y o , provided valuable h e l p in g a t h e r i n g b i b l i o g r a p h i c i n f o r m a t i o n a n d m a t e r i a l s f o r C h a p t e r 1, a n d my s e c r e t a r i e s , M i m i R a n a l l o a n d J a c k i e J a n o s , t y p e d s e v e r a l v e r s i o n s of the m a n u s c r i p t . Of c o u r s e , n o n e of t h e s e i n s t i t u t i o n s o r p e r s o n s is r e s p o n s i b l e f o r w h a t is s a i d h e r e i n . I g r a t e f u l l y d e d i c a t e this b o o k to all t h e s o c i a l s e c u r i t y t e c h n i c i a n s a n d a d m i n i s t r a t o r s in L A C w h o p r o v i d e d t h e v a l u a b l e i n f o r m a t i o n I n e e d e d to w r i t e it, w i t h the h o p e that m y w o r k m a y c o n t r i b u t e to a r e f o r m of social security that m a k e s it m o r e u n i v e r s a l , e q u i t a b l e , f i n a n c i a l l y solid, a n d r e s p o n s i v e to t h e a l l e v i a t i o n of t h e s o c i a l c o s t s of e c o n o m i c r e f o r m in t h e r e g i o n .

Carmelo

Mesa-Lago

1 The Economic Crisis, Restructuring and Adjustment, and Social Costs

The Antecedents and Implementation of the Economic Reform In the 1970s economic policies s t e m m i n g f r o m the Keynesian Revolution, which spread all over the world, resulted in a period of crisis and, in the 1980s, were replaced in many countries by neoliberal policies founded on classical economic theory. The new trends originated in the industrialized countries of North America and Western Europe, and particularly in the United States and Britain, although C h i l e ' s reform was also important. New policies were adopted by international financial agencies and applied to developing countries. The impressive success of the newly industrializing countries in Southeast Asia, largely based on those policies, offered a model for the developing world. T h e downfall of real socialism in Eastern Europe and the USSR and the introduction of m a r k e t - o r i e n t e d policies in all these countries further discredited central planning and state ownership of the means of production, while providing new impetus to the reform. In Western Europe even Social Democratic and Socialist governments (e.g., France, Spain) have a d h e r e d to these policies. And some of the remaining bastions of state dirigisme and the w e l f a r e state have recently shifted course, with the second conservative S w e d i s h government in the last 60 years announcing a dramatic shift toward privatization and a retrenchment from social welfare. The vast majority of countries in Latin A m e r i c a and the Caribbean ( L A C ) have followed the new trend. Recent publications f r o m diverse international and regional organizations acknowledge the universalization of these policies and the need for introducing s o m e of them to L A C . But there is no consensus on specific measures, the roles to be played by the state and the market, and the policies' e f f e c t s and w a y s to tackle their social costs (IDB 1990; E C L A C 1988; Garcia 1991; World Bank 1991). It has also been noted that the application of these policies is more difficult

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C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

in L A C than in d e v e l o p e d c o u n t r i e s ( e x c e p t in E a s t e r n E u r o p e a n d the f o r m e r U S S R ) . For e x a m p l e , b e c a u s e L A C e c o n o m i e s u s u a l l y c o m b i n e m o d ern and traditional s e c t o r s , the r e f o r m c r e a t e s dual p r o b l e m s , a d v e r s e l y a f f e c t i n g t h e m o d e r n s e c t o r (at least i n i t i a l l y ) a n d e x p a n d i n g s o c i a l e x c l u s i o n . F u r t h e r , the d e b t c r i s i s in L A C has put a h e a v y b u r d e n on their e c o n o m i e s , led to a net t r a n s f e r of r e s o u r c e s a b r o a d , a n d r e s u l t e d in p o o r a c c e s s to f r e s h c r e d i t ; d e s p i t e a d j u s t m e n t p o l i c i e s , i n f l a t i o n i n c r e a s e d in the r e g i o n and in s o m e c o u n t r i e s r e a c h e d the level of h y p e r i n f l a t i o n ; and L A C is less integrated into the w o r l d m a r k e t , as a result of w h i c h the m a g n i t u d e of the r e f o r m ' s a d v e r s e c o n s e q u e n c e s a r e h i g h e r ( G a r c i a 1 9 9 1 ) . In t h e 1 9 7 0 s the i n w a r d m o d e l of d e v e l o p m e n t in L A C , b a s e d on the i n c r e a s i n g e c o n o m i c r o l e of the s t a t e a n d i m p o r t - s u b s t i t u t i o n i n d u s t r i a l ization, a p p e a r e d to be e x h a u s t e d . A m o n g n e t - o i l - i m p o r t i n g c o u n t r i e s the oil s h o c k s of 1 9 7 3 a n d 1 9 7 9 d r a m a t i c a l l y i n c r e a s e d i m p o r t c o s t s ; i n s t e a d of t i g h t e n i n g t h e i r b e l t s t h e s e c o u n t r i e s c o n t i n u e d t h e i r e x p a n s i o n a r y policies and borrowed heavily, mostly f r o m foreign private banks. Oile x p o r t i n g c o u n t r i e s t h o u g h t that the p r i c e of oil w o u l d k e e p c l i m b i n g and i n c r e a s e d their i n v e s t m e n t a n d e x p e n d i t u r e s b a s e d on e x t e r n a l c r e d i t . Int e r n a t i o n a l p r i v a t e b a n k s , o v e r f l o w i n g w i t h p e t r o - d o l l a r s , m o v e d f a s t to l e n d that m o n e y to c o u n t r i e s in n e e d , d i s r e g a r d i n g t h e risks i n v o l v e d . At the turn of the 1 9 8 0 s s p i r a l i n g i n t e r n a t i o n a l i n t e r e s t r a t e s , a w o r l d r e c e s s i o n , a n d d e c l i n i n g p r i c e s of r a w m a t e r i a l s ( i n c l u d i n g o i l ) m a d e the b u r den of s e r v i c i n g the debt in L A C h e a v i e r and the c a p a c i t y to pay l o w e r . In 1 9 8 2 t h e M e x i c a n r e q u e s t to r e n e g o t i a t e its f o r e i g n d e b t c r e a t e d an intern a t i o n a l p a n i c that led to a v i r t u a l halt of n e w c r e d i t f o r all of L A C . Int e r n a t i o n a l l e n d i n g o r g a n i z a t i o n s (e.g., I M F , W o r l d B a n k ) b e c a m e interm e d i a r i e s f o r p r i v a t e b a n k l e n d e r s in n e g o t i a t i n g t h e e x t e r n a l d e b t , i n c r e a s e d their b a r g a i n i n g l e v e r a g e w i t h b o r r o w i n g c o u n t r i e s , and c o n d i t i o n e d n e w loans (both p r i v a t e a n d i n t e r n a t i o n a l ) to t h e i n t r o d u c t i o n of ref o r m s ( I D B 1985; E C L A C 1 9 8 8 ) . T w o d i f f e r e n t s e t s of p o l i c i e s w e r e a d v o c a t e d : ( 1 ) s h o r t - t e r m m e a s u r e s of i n t e r n a l adjustment and stabilization geared toward reducing the d o m e s t i c disequilibrium and a b a t i n g s k y r o c k e t i n g inflation; and (2) m e d i u m - or l o n g - r a n g e p o l i c i e s of e c o n o m i c restructuring to p r o m o t e an o u t w a r d - o r i e n t e d d e v e l o p m e n t s t r a t e g y b a s e d o n o p e n i n g to a n d i n s e r t i o n i n t o the w o r l d e c o n o m y , i n c r e a s i n g d o m e s t i c a n d i n t e r n a t i o n a l c o m p e t i tion, p r i v a t i z i n g , a n d d e r e g u l a t i n g . A d j u s t m e n t p o l i c i e s w e r e initiated by m o s t L A C c o u n t r i e s in t h e f i r s t half of t h e 1 9 8 0 s , w h e r e a s r e s t r u c t u r i n g p o l i c i e s (with o n e e x c e p t i o n ) b e g a n in the s e c o n d half of the d e c a d e : 1 9 7 5 in C h i l e ; 1 9 8 5 in B o l i v i a , C o s t a R i c a , a n d M e x i c o ; 1 9 8 9 in A r g e n t i n a , J a m a i c a , a n d V e n e z u e l a ; a n d 1 9 9 0 - 1 9 9 1 in C o l o m b i a , P e r u , B r a z i l (although some elements were introduced earlier), and Uruguay. T h e eff e c t s of a d j u s t m e n t p o l i c i e s w e r e felt in t h e s e c o u n t r i e s m o s t l y in the first half of t h e 1 9 8 0 s , b u t f o r m o s t c o u n t r i e s ( e x c e p t C h i l e ) t h e i m p a c t of

CRISIS, ADJUSTMENT/RESTRUCTURING, SOCIAL COSTS

3

restructuring is just b e g i n n i n g to be felt. In s o m e c a s e s a d j u s t m e n t p o l i c i e s w e r e m i x e d with s o m e e l e m e n t s of r e s t r u c t u r i n g , m a k i n g their r e s p e c t i v e e f f e c t s d i f f i c u l t to s e p a r a t e . F u r t h e r m o r e , only Chile has p a s s e d the transitional stage of r e s t r u c t u r i n g and is n o w in a c o n s o l i d a t i o n stage, w h e r e a s the r e m a i n i n g c o u n t r i e s are still in or e n t e r i n g the transitional s t a g e . T h e full e f f e c t s of r e s t r u c t u r i n g will be felt in f o r t h c o m i n g y e a r s . O n l y the e x p e r i e n c e of Chile can be fully e v a l u a t e d ; h e n c e , only p r e l i m i n a r y a s s e s s m e n t s can be m a d e of Bolivia, Costa R i c a , and M e x i c o . F u r t h e r m o r e , the r e s t r u c t u r i n g p o l i c i e s of all these c o u n t r i e s , a l t h o u g h c o i n c i d i n g on their f u n d a m e n t a l e l e m e n t s , h a v e d i v e r g e d on i m p o r t a n t a s p e c t s : C h i l e ' s a p p r o a c h h a s b e e n the m o s t r a d i c a l ; it u s e d a " s h o c k t r e a t m e n t , " a n d the t r a n s i t i o n lasted l o n g e r a n d p r o v o k e d the w o r s t social e f f e c t s ; the o t h e r t h r e e c o u n t r i e s ( p r o b a b l y l e a r n i n g f r o m the C h i l e a n e x p e r i e n c e ) a p p l i e d m o r e g r a d u a l , m o d e r a t e policies, and the transitional s t a g e a p p e a r s to be shorter a n d the social costs less ( G a r c i a 1991). A c c o r d i n g to the W o r l d B a n k , the r e f o r m must be c o m p r e h e n s i v e a n d s t e a d y ; partial a t t e m p t s are d o o m e d to f a i l , and c a p r i c i o u s r e v e r s a l s are h a r m f u l . But I h a v e a l r e a d y n o t e d that t h e r e are d i v e r s e r e f o r m p o l i c i e s a m o n g countries, and I will s h o w later that s o m e c o u n t r i e s h a v e m o d i f i e d their policies to correct errors or r e d u c e e x c e s s i v e l y h a r m f u l e f f e c t s . Furt h e r m o r e , a g r e e m e n t on s o m e s p e c i f i c p o l i c i e s is not c o m p l e t e a m o n g the i n t e r n a t i o n a l a g e n c i e s s u p p o r t i n g the r e f o r m . T h e W o r l d B a n k a l s o adv i s e s p o l i c y m a k e r s to be realistic in both the s o u r c e s of f i n a n c i n g the ref o r m and e x p e c t a t i o n s about its o u t c o m e s ( W o r l d Bank 1991). H o w e v e r , the r e f o r m is e x p e c t e d to be c o m p r e h e n s i v e and radical, so it will r e q u i r e s u b s t a n t i a l o u t s i d e f u n d i n g not a v a i l a b l e for most L A C c o u n t r i e s . In addition, if the r e f o r m o u t c o m e s are m o d e s t and p a i n f u l it will be d i f f i c u l t to m o b i l i z e support, particularly a m o n g those most badly a f f e c t e d , w h o o f t e n c o n s t i t u t e the m a j o r i t y of the p o p u l a t i o n . T h e f o l l o w i n g p a g e s s u m m a r i z e the m a i n f e a t u r e s of both a d j u s t m e n t a n d r e s t r u c t u r i n g r e f o r m s , as a d v o cated by international lending o r g a n i z a t i o n s , as well as d i v e r s e a p p r o a c h e s tried in the region, their social c o s t s , and the overall s o c i o e c o n o m i c deterioration s u f f e r e d by L A C in the 1980s.

The Policies of Economic Reform and Their Effects Adjustment

and

Stabilization

A r e s p o n s i b l e f i s c a l p o l i c y that r e d u c e s or e l i m i n a t e s the g o v e r n m e n t d e f i c i t is c o n s i d e r e d essential to r e d u c e inflation to a c c e p t a b l e levels a n d to f o r m the b a s i s for r e s t r u c t u r i n g a n d f u t u r e s t e a d y , h e a l t h y g r o w t h . T h e r e is no a g r e e m e n t on w h e t h e r to a c h i e v e that e n d by tax i n c r e a s e s or by r e d u c t i o n in p u b l i c e x p e n d i t u r e s . T h e latter can be i m p l e m e n t e d m o r e

4

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

e a s i l y a n d r a p i d l y than a s e n s i b l e tax r e f o r m a n d h e n c e h a s b e e n used m o r e e x t e n s i v e l y . C o m m o n m e a s u r e s h a v e been r e d u c t i o n s in the p u b l i c w a g e bill (by c u t t i n g e m p l o y m e n t , real w a g e s , or b o t h ) ; r e s t r i c t i o n s in p u b l i c c r e d i t a n d m o n e t a r y e m i s s i o n ; c u t s in state s u b s i d i e s to c o v e r l o s s e s in s t a t e - o w n e d e n t e r p r i s e s ( S O E s ) as well as f o r c o n s u m e r g o o d s and services; and d e c r e a s e s in p u b l i c e x p e n d i t u r e s , p a r t i c u l a r l y social serv i c e s . T h e s e d r a s t i c c u t s h a v e s i g n i f i c a n t l y c o n t r i b u t e d to r i s i n g u n e m p l o y m e n t , d e c l i n i n g real w a g e s , and a w o r s e n i n g s i t u a t i o n for the poor. It has recently been a c k n o w l e d g e d that the debt o v e r h e a d is a d r a g on stabilization and s h o u l d therefore be r e d u c e d . T a x r e f o r m is o f t e n o b s t r u c t e d in L A C b e c a u s e of i n e f f i c i e n c i e s in the s y s t e m of collection and w i d e s p r e a d e v a s i o n . I m p o r t a n t p r i n c i p l e s of r e f o r m are that the tax b a s e s h o u l d be b r o a d , the s y s t e m s i m p l i f i e d , and its e f f i c a c y i m p r o v e d ; less e m p h a s i s is p l a c e d on taxation as a tool of i n c o m e d i s t r i b u t i o n . C u t s in p u b l i c e x p e n d i t u r e s and social s e r v i c e s w e r e w i d e s p r e a d in L A C , particularly in the first half of the 1980s. On the r e v e n u e side there has b e e n a shift f r o m i n c o m e to e x p e n d i t u r e t a x a t i o n (in 1990 the v a l u e a d d e d tax ( V A T ) was in e f f e c t in 17 out of 25 c o u n t r i e s ) ; a r e d u c t i o n in t a x e s on c o r p o r a t e p r o f i t s and d i v i d e n d s ; an i n c r e a s e in social s e c u r i t y c o n t r i b u t i o n s (in Chile the e m p l o y e r has not paid any s i n c e 1981); a n d the i n t r o d u c t i o n of user f e e s , p a r t i c u l a r l y in h e a l t h - c a r e s e r v i c e s ( I D B 1990; W i l l i a m s o n 1990; Garcia 1991). Outward-Oriented Development, and Integration into the Global

Trade Liberalization, Economy

P r o t e c t i o n of i n e f f i c i e n t d o m e s t i c industry is c o n s i d e r e d to create costly e c o n o m i c distortions and e v e n t u a l l y p e n a l i z e e x p o r t s a n d i m p o v e r i s h the e c o n o m y . T h e r e f o r e the new strategy calls for a country to open itself to international capital, goods, and services and to establish an o u t w a r d - o r i e n t e d e c o n o m y with e x p o r t s (particularly n o n t r a d i t i o n a l o n e s ) as the e n g i n e of g r o w t h . Increasing competition within the country and f r o m o u t s i d e is required to m a k e the d o m e s t i c e c o n o m y m o r e efficient and p r o m o t e technological innovation. T h e incentive system related to relative prices should be c h a n g e d to favor expansion of investment and production of export g o o d s . Easy a c c e s s to i n t e r m e d i a t e inputs at c o m p e t i t i v e prices (in order to promote exports) and the elimination of taxes on exports are both e n c o u r a g e d . T r a d e liberalization implies a m o v e away f r o m a d m i n i s t r a t i v e controls, and c o m m o n m a r k e t s s h o u l d e l i m i n a t e internal tariffs. C o m p e t i t i v e e x c h a n g e rates (set by market forces) are seen as essential to export d e v e l o p m e n t . Restrictions on the entry of foreign direct investment s h o u l d b e eliminated bec a u s e such i n v e s t m e n t b r i n g s n e e d e d capital, t e c h n o l o g y , and skills, thus contributing to increases in production and e m p l o y m e n t . Debt-equity s w a p s are e n c o u r a g e d to reduce the debt and p r o m o t e foreign investment.

CRISIS, A D J U S T M E N T / R E S T R U C T U R I N G , S O C I A L COSTS

5

T h e s e policies have been a d o p t e d by several L A C c o u n t r i e s but with v a r y i n g d e g r e e s of rapidity and d e p t h . In C h i l e there w a s an a b r u p t elimination of i m p o r t r e s t r i c t i o n s that, a f t e r d e c a d e s of p r o t e c t i o n i s m , led to w i d e s p r e a d i n d u s t r i a l s h u t d o w n s ( r e s u l t i n g in h u g e u n e m p l o y m e n t a n d trade d e f i c i t s ) ; in the 1980s, b e c a u s e of the crisis, t a r i f f s w e r e i n c r e a s e d s o m e w h a t and the Chilean g o v e r n m e n t r e d u c e d t h e m later w h e n the econo m y i m p r o v e d ; the e x c h a n g e rate p o l i c y w a s c h a n g e d s e v e r a l t i m e s as well. O t h e r c o u n t r i e s (e.g., Costa R i c a ) h a v e s h o w n m o r e c a u t i o n by red u c i n g t a r i f f s g r a d u a l l y , g i v i n g the state a key r o l e in s u p p o r t i n g n e w t e c h n o l o g i e s and p e n e t r a t i n g external m a r k e t s , and a v o i d i n g drastic deind u s t r i a l i z a t i o n ( a n d h u g e u n e m p l o y m e n t ) by r e c o n v e r t i n g traditional industry with the aid of credit. C o n c e r n i n g f o r e i g n i n v e s t m e n t , Chile not only has e n f o r c e d the m o s t liberal p o l i c y but also has b e e n a p i o n e e r in debt-equity s w a p s — a n approach that eventually r e d u c e d the external debt. Previous p o l i c i e s i n v o l v i n g e x c e s s i v e r e g u l a t i o n of f o r e i g n direct investment a p p e a r to be g o n e , and there is c o n s i d e r a b l y less d i s c r i m i n a t i o n between f o r e i g n a n d d o m e s t i c i n v e s t m e n t ; s o m e c o u n t r i e s are g i v i n g p r e f e r e n c e to f o r e i g n capital that fills a d o m e s t i c v o i d . R e c e n t l y M e x i c o m o d i f i e d its f o r e i g n i n v e s t m e n t law, a l l o w i n g an increase in the share of foreign o w n e r s h i p and o p e n i n g areas p r e v i o u s l y r e s e r v e d for state or private d o m e s t i c c a p i t a l . A l t h o u g h M e x i c o is also s u p p o r t i n g d e b t - e q u i t y s w a p s , the extent to which it does so and the c o r r e s p o n d i n g debt reduction are m u c h less than in Chile ( W i l l i a m s o n 1990; W o r l d B a n k 1991; Garcia 1991).

Restructuring

the Public Sector: Privatization

and

Deregulation

A c c o r d i n g to the W o r l d B a n k , both the m a r k e t and the g o v e r n m e n t have important roles to play in the new m o d e l ; h e n c e , the s u p p o s e d d i c h o t o m y b e t w e e n interventionist and l a i s s e z - f a i r e a p p r o a c h e s is j u d g e d to be false. N e v e r t h e l e s s , r e s t r u c t u r i n g involves a w i t h d r a w a l of the state f r o m t h o s e a r e a s in w h i c h the m a r k e t p e r f o r m s w e l l (e.g., p r o d u c t i o n , d e l i v e r y of g o o d s and certain s e r v i c e s ) and a s h i f t of p u b l i c action to areas w h e r e the m a r k e t p r o v e s to be i n a d e q u a t e (e.g., p r o t e c t i n g the p o o r ) . U n d e r a " m a r k e t - f r i e n d l y " a p p r o a c h the g o v e r n m e n t s h o u l d a l l o w the m a r k e t s to f u n c tion properly by c r e a t i n g an " e n a b l i n g e n v i r o n m e n t , " or stable m a c r o e c o n o m i c f o u n d a t i o n (e.g., i n f r a s t r u c t u r e , l a w s , i n s t i t u t i o n s ) , a n d r e s t o r i n g c o n f i d e n c e in the private sector. P r i v a t i z a t i o n of S O E s is j u s t i f i e d on the belief that p r i v a t e e n t e r p r i s e s are m a n a g e d m o r e e f f i c i e n t l y b e c a u s e of c o m p e t i t i o n , the threat of b a n k r u p t c y , a n d the p r o f i t i n c e n t i v e , w h e r e a s S O E s are o f t e n heavily s u b s i d i z e d and d o not f a c e c o m p e t i t i o n . In a d d i tion, privatization can help r e d u c e s u b s i d i e s a n d b a l a n c e the b u d g e t , gene r a t e s h o r t - r u n r e v e n u e n e e d e d f o r h i g h e r state p r i o r i t i e s (e.g., m o d e r n ization, p a y i n g the d e b t ) , and p r e v e n t i n e f f i c i e n t i n v e s t m e n t in the l o n g

6

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

run. H o w e v e r , p r i v a t i z a t i o n s h o u l d not be an end by itself but rather a m e a n s to use s c a r c e r e s o u r c e s m o r e e f f i c i e n t l y . T h i s in turn requires state i n t e r v e n t i o n both to curtail the f o r m a t i o n of private m o n o p o l i e s and the i m p r o p e r o p e r a t i o n of p r i v a t e e n t e r p r i s e s and to p r o m o t e c o m p e t i t i o n . F u r t h e r m o r e , p r i v a t i z a t i o n m u s t be a c c o m p a n i e d by such o t h e r m e a s u r e s as d e r e g u l a t i o n , t r a d e l i b e r a l i z a t i o n , c o r r e c t i o n of d i s t o r t i o n s , etc. T h e g o v e r n m e n t s h o u l d s t o p f i x i n g p r i c e s of g o o d s and s e r v i c e s , the interest rate, a n d the e x c h a n g e rate, all of w h i c h s h o u l d be set by the m a r k e t . D e r e g u l a t i o n of the d o m e s t i c f i n a n c i a l s y s t e m relies on the interest rate as its key m e c h a n i s m ; m a r k e t - f i x e d interest rates s h o u l d help p r e v e n t a misa l l o c a t i o n of c a p i t a l that results f r o m a b u r e a u c r a t i c a l l o c a t i o n of credit based on arbitrary criteria. D e r e g u l a t i o n of the labor market m a k e s it more f l e x i b l e , t h e r e b y f a c i l i t a t i n g labor m o b i l i t y , r e d u c i n g labor c o s t s , and allowing technological innovation. C h i l e has been at the v a n g u a r d of p r i v a t i z a t i o n since the m i d - 1 9 7 0 s ; S O E s w e r e sold in the m i d - 1 9 8 0 s at prices b e l o w m a r k e t v a l u e , with the g o v e r n m e n t p r o v i d i n g 9 5 percent of credit at zero real interest. Privatization has not been limited to S O E s but has e x t e n d e d to social security (pensions) and health care. In other c o u n t r i e s privatization has been delayed or b e e n m o r e l i m i t e d or s e l e c t i v e . J a m a i c a ' s d i v e s t m e n t of S O E s b e g a n in 1981. Costa Rica started the p r o c e s s in 1985 and by the e n d of the d e c a d e had privatized 35 e n t e r p r i s e s of C O D E S A but retained the rest. M e x i c o ' s 1,155 S O E s in 1983 w e r e r e d u c e d to 3 1 0 by 1990, but only half w e r e priv a t i z e d ( a c c o u n t i n g f o r a b o u t 2 0 p e r c e n t of the S O E s ' total a s s e t s ) , and the rest w e r e t r a n s f e r r e d to state a n d local g o v e r n m e n t s or m e r g e d with o t h e r p u b l i c i n s t i t u t i o n s ; m a n y of the r e m a i n i n g S O E s h a v e been m a d e m o r e e f f i c i e n t . In U r u g u a y a f e w S O E s w e r e shut d o w n , a n d there has b e e n a r e p r i v a t i z a t i o n of f i n a n c i a l i n s t i t u t i o n s . T h e p r o c e s s b e g a n in A r g e n t i n a o n l y in 1 9 9 0 - 1 9 9 1 . D e r e g u l a t i o n of the labor m a r k e t w a s p r o f o u n d in Chile, aided by an a u t h o r i t a r i a n g o v e r n m e n t that drastically red u c e d u n i o n p o w e r , p r o h i b i t e d s t r i k e s , a n d s u s p e n d e d or i n t e r v e n e d in c o l l e c t i v e b a r g a i n i n g . Bolivia also c u r t a i l e d unions and s u s p e n d e d c o l l e c tive b a r g a i n i n g , a l t h o u g h to a l e s s e r e x t e n t . O t h e r c o u n t r i e s have app r o a c h e d this issue in a m o r e d e m o c r a t i c m a n n e r , f a c i l i t a t e d by a social c o n s e n s u s ( W i l l i a m s o n 1990; W o r l d B a n k 1991; Garcia 1991).

Social Costs, Distribution

of the Burden,

and Compensatory

Policies

I have previously n o t e d the d i f f i c u l t i e s i n v o l v e d in s e p a r a t i n g the e f f e c t s of a d j u s t m e n t a n d r e s t r u c t u r i n g p o l i c i e s a n d in a s s e s s i n g their i m p a c t in c o u n t r i e s that are still in the transition s t a g e . But it is w i d e l y r e c o g n i z e d that both sets of p o l i c i e s h a v e i n d u c e d s u b s t a n t i a l social c o s t s that h a v e not been e q u i t a b l y d i s t r i b u t e d a m o n g v a r i o u s s e c t o r s of s o c i e t y . For instance, capital a n d b u s i n e s s have b e n e f i t t e d f r o m labor m a r k e t flexibility, e l i m i n a t i o n or r e d u c t i o n of c o r p o r a t e taxes and e m p l o y e r s ' social security

CRISIS, ADJUSTMENT/ RESTRUCTURING, SOCIAL COSTS

7

c o n t r i b u t i o n s , and the sale of S O E s at very l o w p r i c e s a n d w i t h c r e d i t f a cilities. ( A n o t h e r b u s i n e s s s e c t o r , h o w e v e r , has b e e n a d v e r s e l y a f f e c t e d by the e l i m i n a t i o n of p r o t e c t i o n i s m . ) L a b o r a n d t h e p o o r h a v e s u f f e r e d f r o m cuts in e m p l o y m e n t a n d e a s i e r d i s m i s s a l of n o n - n e e d e d w o r k e r s , the e l i m ination of s u b s i d i e s f o r c o n s u m e r g o o d s , p r i c e i n c r e a s e s f o r e s s e n t i a l c o n s u m e r g o o d s , a r e d u c t i o n in social s e r v i c e s , t h e i n t r o d u c t i o n of user f e e s , s h i f t s in t a x a t i o n ( u s u a l l y t o w a r d m o r e r e g r e s s i v e c o n s u m e r t a x e s ) , a n d a d e c l i n e in real w a g e s ( a g g r a v a t e d in a u t h o r i t a r i a n c o u n t r i e s by t h e c o n t r o l of u n i o n s a n d s u s p e n s i o n of c o l l e c t i v e b a r g a i n i n g ) . T h e r a t i o n a l e b e h i n d t h e s e p o l i c i e s is that they are n e e d e d to s o l v e the c r i s e s a n d as a p r e c o n d i t i o n f o r r e a c h i n g f u t u r e high r a t e s of g r o w t h , p r o d u c t i v e e m p l o y m e n t , a n d i n c o m e . S o far t h e e x p e r i e n c e s of a f e w c o u n t r i e s that h a v e a p p l i e d b o t h r a d i c a l a n d m o d e r a t e t y p e s of p o l i c i e s ( C h i l e , C o s t a R i c a , M e x i c o ) s u g g e s t that t h e o u t c o m e is e v e n t u a l l y p o s i t i v e . H o w e v e r , that f a c t d o e s not j u s t i f y the heavy b u r d e n i m p o s e d on labor a n d t h e p o o r . R e c e n t l y s o m e i n t e r n a t i o n a l l e n d i n g a g e n c i e s h a v e a c k n o w l e d g e d the social c o s t s of the r e f o r m and r e c o m m e n d e d p o l i c i e s to a m e l i o r a t e t h e m : ( 1 ) c u s h i o n t h e n e g a t i v e e f f e c t s of a d j u s t m e n t on t h e m o s t a d v e r s e l y a f f e c t e d g r o u p s ( p a r t i c u l a r l y the p o o r ) t h r o u g h s p e c i a l p r o g r a m s of a s s i s t a n c e and t h r o u g h m a i n t e n a n c e or e x p a n s i o n of s e l e c t i v e s o c i a l p r o g r a m s ; ( 2 ) d i s t r i b u t e the b u r d e n of a d j u s t m e n t m o r e e q u i t a b l y b e t w e e n l a b o r a n d b u s i n e s s , p r e f e r a b l y t h r o u g h a s o c i a l p a c t or, if that f a i l s , b y d i r e c t s t a t e a c t i o n ; ( 3 ) d e v e l o p a l o n g - r u n p o l i c y of " i n v e s t m e n t in p e o p l e " b e c a u s e the m a r k e t a l o n e d o e s not g e n e r a l l y e n s u r e a s a f e t y net f o r c e r t a i n parts of s o c i e t y ( e s p e c i a l l y t h e p o o r e s t ) ; h e n c e , t h e g o v e r n m e n t s h o u l d i n v e s t in nutrition, education, health care, family planning, and poverty alleviation; a n d ( 4 ) i n c r e a s e the d e g r e e of e q u a l i t y in d i s t r i b u t i o n ( p a r t i c u l a r l y in c o u n t r i e s w i t h p r o n o u n c e d i n e q u a l i t i e s ) , not t h r o u g h i n c o m e t r a n s f e r s ( e x c e p t in the c a s e of s a f e t y nets f o r v u l n e r a b l e g r o u p s ) but by s p e c i f i c p u b lic social s e r v i c e s ( I D B 1990; W o r l d B a n k 1 9 9 1 ) . A s s t a t e d e a r l i e r , L A C c o u n t r i e s s h o w i m p o r t a n t d i f f e r e n c e s in t h e l e n g t h of the t r a n s i t i o n , the m a g n i t u d e of t h e social c o s t s , a n d t h e d i s t r i b u tion of t h e b u r d e n . In C h i l e the t r a n s i t i o n t o o k a p p r o x i m a t e l y 10 y e a r s , a n d c o s t s in t e r m s of social e x c l u s i o n a n d u n e m p l o y m e n t w e r e v e r y high ( t h u s i m p o s i n g the h e a v i e s t b u r d e n on l a b o r a n d the p o o r ) . T h e s e n e g a t i v e e f f e c t s w e r e partly a s s o c i a t e d w i t h the a u t h o r i t a r i a n n a t u r e of t h e r e g i m e b u t a l s o w i t h t h e e x c e s s i v e r a p i d i t y , d e p t h , a n d n u m b e r of e r r o r s of its p o l i c i e s . On the o t h e r h a n d , the e v e n t u a l o u t c o m e of t h e C h i l e a n r e f o r m — in e c o n o m i c g r o w t h , c r e a t i o n of p r o d u c t i v e e m p l o y m e n t , a n d r e c u p e r a t i o n of p r e r e f o r m w a g e l e v e l s — h a s b e e n t h e b e s t so far. A n a c c u r a t e c o m p a r ison of the e f f e c t s of t h e r e f o r m in C h i l e w i t h t h o s e of o t h e r c o u n t r i e s is n o t p o s s i b l e at this t i m e b e c a u s e o n l y C h i l e h a s c o m p l e t e d t h e p r o c e s s . B u t so far in C o s t a R i c a ( a n d to a l e s s e r e x t e n t in M e x i c o a n d B o l i v i a ) t h e l e n g t h of t h e t r a n s i t i o n a p p e a r s to be s h o r t e r , the social c o s t s l i g h t e r , a n d t h e b u r d e n m o r e e q u i t a b l y d i s t r i b u t e d . N o t o n l y has r e s t r u c t u r i n g in t h e s e

8

C H A N G I N G SOCIAL SECURITY IN LATIN AMERICA

c o u n t r i e s b e e n i m p l e m e n t e d in a m o r e g r a d u a l a n d m o d e r a t e f a s h i o n , but it h a s a l s o b e e n a c c o m p a n i e d b y c o m p e n s a t o r y p o l i c i e s t o a l l e v i a t e s o c i a l c o s t s and/or a t t e m p t s to r e a c h s o c i a l c o n s e n s u s . ( H o w e v e r , t h e e c o n o m i c r e c u p e r a t i o n — i n terms o f growth rates and productive e m p l o y m e n t crea t i o n — d o e s not a p p e a r a s v i g o r o u s in t h e s e c o u n t r i e s a s in C h i l e . ) C o s t a R i c a l a u n c h e d an e m p l o y m e n t p r o g r a m ; s t r e n g t h e n e d e x i s t i n g h e a l t h c a r e , nutrition, and w e l f a r e p r o g r a m s f o r m a r g i n a l urban and rural g r o u p s ; introduced a housing p r o g r a m ; and adjusted salaries o f the lowest

income

groups proportionally higher than t h o s e o f m i d d l e and high i n c o m e g r o u p s ( t h e m i n i m u m w a g e h a s not d e c l i n e d d u r i n g r e s t r u c t u r i n g ) . B o l i v i a e s t a b l i s h e d an e m e r g e n c y s o c i a l f u n d to h e l p p o o r g r o u p s . In M e x i c o a s o c i a l p a c t w a s s i g n e d b e t w e e n b u s i n e s s , l a b o r , a n d the g o v e r n m e n t to b e t t e r d i s t r i b u t e c o s t s , a n d s u p p o r t h a s b e e n g i v e n to t h e " s o c i a l s e c t o r " ( e . g . , s e l f m a n a g e d e n t e r p r i s e s , c o o p e r a t i v e s ) to r e d u c e s o c i a l c o s t s . ( I t s h o u l d b e n o t e d that s u b s t a n t i a l i n t e r n a t i o n a l a i d to M e x i c o f a c i l i t a t e d a s i m u l t a n e o u s p r o c e s s o f r e s t r u c t u r i n g a n d e x p a n s i o n , thus h e l p i n g to r e d u c e s o c i a l c o s t s . ) A c t u a l l y , after the crisis o f 1 9 8 1 - 1 9 8 3 C h i l e adopted m o r e m o d e r a t e p o l i c i e s ( e . g . , i n c r e a s e in t a r i f f s , s t a t e i n t e r v e n t i o n

in b a n k s

s o m e e n t e r p r i s e s to a v o i d b a n k r u p t c y ) , l a u n c h e d s p e c i a l s o c i a l

and

programs

targeted to help the poor ( e . g . , e m e r g e n c y e m p l o y m e n t , m i n i m a l

social

protection), and shifted p u b l i c e x p e n d i t u r e s toward nutrition and primary h e a l t h c a r e , t a r g e t i n g the l o w - i n c o m e m o t h e r / i n f a n t g r o u p . T h e s e p o l i c i e s helped alleviate c o s t s s o m e w h a t and since 1 9 9 0 have b e e n e x p a n d e d by the new d e m o c r a t i c g o v e r n m e n t that has a l s o e n a c t e d a tax r e f o r m

and

t r i e d to i n c r e a s e s o c i a l c o n s e n s u s . W i t h t h e p r o c e s s o f d e m o c r a t i z a t i o n v i r t u a l l y u n i v e r s a l in L A C , possibility

of replicating

the radical

Chilean

approach

of

the

1974-1989

throughout the region appears s l i m ; t h e r e f o r e the m o r e gradual, m o d e r a t e , s o c i a l - c o s t - c o n s c i o u s approach should be m o r e f e a s i b l e unless the positive t r e n d s in e c o n o m i c r e c o v e r y a l r e a d y a c h i e v e d a r e r e v e r s e d in t h e f u t u r e . In s u m m a r y , a l t h o u g h m o r e t i m e a n d r e s e a r c h a r e n e e d e d t o r e a c h sound c o n c l u s i o n s , the a v a i l a b l e e v i d e n c e i n d i c a t e s that a d j u s t m e n t , and p a r t i c u l a r l y r e s t r u c t u r i n g , c a n b e a p p l i e d s o as to m i n i m i z e t h e i r n e g a t i v e e f f e c t s on the m o s t v u l n e r a b l e s e c t o r s o f s o c i e t y . S o c i a l s e c u r i t y s h o u l d p l a y an i m p o r t a n t r o l e in c o m p e n s a t i n g t h e s o c i a l c o s t s o f a d j u s t m e n t , b u t it s h o u l d b e i m p l e m e n t e d j u d i c i o u s l y to a v o i d h a r m i n g t h e p r o c e s s o f e c o nomic recovery.

The Deterioration of Socioeconomic Conditions in LAC from 1980 to 1990 T a b l e 1.1 p r e s e n t s a s e r i e s o f i n d i c a t o r s that s h o w b o t h t h e s e r i o u s n e s s o f t h e e c o n o m i c c r i s i s in L A C a n d i t s e f f e c t s . I d o n o t a t t e m p t h e r e i n

to

CRISIS, ADJUSTMENT/ RESTRUCTURING, SOCIAL COSTS

9

s e p a r a t e t h e e f f e c t s of the c r i s i s itself f r o m t h o s e of a d j u s t m e n t a n d res t r u c t u r i n g policies b u t only to s h o w t h e d e t e r i o r a t i n g s o c i o e c o n o m i c c o n d i t i o n s in the r e g i o n f r o m 1 9 8 0 - 1 9 9 0 . O n e i m p o r t a n t c a u s e of the crisis h a s b e e n the r a p i d g r o w t h of the external d e b t a n d the h e a v y b u r d e n of its s e r v i c e . In 1985 t h e a v e r a g e disb u r s e d d e b t w a s t h r e e a n d a half t i m e s h i g h e r t h a n t h e v a l u e of e x p o r t s a n d s e r v i c e s . A l t h o u g h s u c h b u r d e n had d e c l i n e d in 1 9 9 0 r e l a t i v e to 1985, in 41 p e r c e n t of the c o u n t r i e s the b u r d e n in 1 9 9 0 w a s a b o u t t w i c e as high as that in 1980, and in 2 3 p e r c e n t it w a s f r o m t h r e e to six t i m e s h i g h e r . T o s e r v i c e t h e d e b t a n d f o l l o w a d j u s t m e n t p r o g r a m s , t h e s t a t e s s h a r p l y red u c e d t h e i r e x p e n d i t u r e s : the a v e r a g e g r o w t h r a t e of g o v e r n m e n t c o n s u m p t i o n d r a m a t i c a l l y s l o w e d d o w n in 9 0 p e r c e n t of t h e c o u n t r i e s in the 1 9 8 0 s , a n d the rate w a s a c t u a l l y n e g a t i v e in o n e - t h i r d of t h e m . T h e d e c l i n e in p r i v a t e c o n s u m p t i o n f o l l o w e d a s i m i l a r p a t t e r n . T h e r e w a s not o n l y a s h a r p cut in g r o s s d o m e s t i c i n v e s t m e n t ( f r o m 2 3 p e r c e n t to 16 perc e n t f r o m 1 9 8 0 - 1 9 8 4 ) b u t a l s o a n e g a t i v e net t r a n s f e r of L A C c a p i t a l a b r o a d that f r o m 1 9 8 2 - 1 9 9 0 a m o u n t e d to U . S . $ 2 3 4 b i l l i o n , c o m p a r e d w i t h a p o s i t i v e net t r a n s f e r to L A C of U . S . $ 9 5 b i l l i o n f r o m 1 9 7 3 - 1 9 8 1 ( E C L A C 1990a). A s a result, the real r e g i o n a l G D P p e r c a p i t a d e c l i n e d by 9 . 6 p e r c e n t f r o m 1 9 8 1 - 1 9 9 0 , r e g r e s s i n g to t h e 1 9 7 6 - 1 9 7 7 l e v e l ; 7 7 p e r c e n t of the L A C c o u n t r i e s s u f f e r e d a d e c r e a s e in G D P p e r c a p i t a , and in t w o - t h i r d s of t h e m the loss w a s w o r s e than the r e g i o n a l a v e r a g e . T h e r e g i o n a l a v e r a g e rate of i n f l a t i o n i n c r e a s e d 2 6 t i m e s f r o m 1 9 8 0 - 1 9 9 0 . W h e r e a s in 1 9 8 0 only o n e - t h i r d of the L A C c o u n t r i e s had an a n n u a l rate h i g h e r than 2 5 p e r c e n t , in 1 9 9 0 t w o - t h i r d s e x c e e d e d that rate a n d f o u r c o u n t r i e s s u f f e r e d f r o m h y p e r i n f l a t i o n . T h o s e m o s t a f f e c t e d by i n f l a t i o n h a v e been the l o w e s t i n c o m e g r o u p s , p a r t i c u l a r l y in u r b a n a r e a s . R e a l w a g e s s h r a n k : in 1 9 8 9 t h e a v e r a g e w a g e in t w o - t h i r d s of t h e c o u n tries w a s b e l o w the 1 9 8 0 level, and t h e m i n i m u m w a g e ( a f f e c t i n g the lowest i n c o m e strata) w a s b e l o w the 1 9 8 0 level in 8 3 p e r c e n t of the c o u n t r i e s . T h e regional average open urban u n e m p l o y m e n t rate rose f r o m 7.3 perc e n t to 10.5 p e r c e n t f r o m 1 9 8 0 - 1 9 8 5 , a n d a l t h o u g h it d e c l i n e d to 8 . 3 p e r c e n t in 1 9 8 9 it w a s still a b o v e the 1 9 8 0 level; in t w o - t h i r d s of the c o u n t r i e s the 1 9 8 9 rate w a s a b o v e that of 1 9 8 0 . T h e j o b l e s s s i t u a t i o n w o u l d h a v e been w o r s e if it w e r e not f o r an e x p a n s i o n of i n f o r m a l e m p l o y m e n t f r o m 2 3 . 8 p e r c e n t to 2 9 . 5 p e r c e n t of t h e n o n a g r i c u l t u r a l l a b o r f o r c e , or f r o m 29 p e r c e n t to 3 0 p e r c e n t of the u r b a n l a b o r f o r c e . In 1 9 8 9 half of the e m p l o y m e n t w a s c o n c e n t r a t e d in i n f o r m a l a n d m a c r o e n t e r p r i s e s ( T o k m a n 1 9 8 6 ; G a r c i a 1 9 9 1 ) . S i m i l a r l y u n d e r e m p l o y m e n t that h a d d e c l i n e d f r o m 1 9 5 0 - 1 9 8 0 w o r s e n e d in t h e 1 9 8 0 s . A c c o r d i n g to t h e I n t e r - A m e r i c a n D e v e l o p m e n t B a n k ( I D B ) , e v e n if the g r o s s d o m e s t i c p r o d u c t ( G D P ) w e r e to r e a c h 3 or 4 p e r c e n t p e r y e a r in the 1 9 9 0 s ( t h r e e to f o u r t i m e s t h e a v e r a g e of t h e 1 9 8 0 s ) , o p e n u n e m p l o y m e n t w o u l d c o n t i n u e to be s e r i o u s a n d u n d e r e m p l o y m e n t d i f f i c u l t to r e v e r s e .

10

Table 1.1

C H A N G I N G SOCIAL SECURITY IN L A T I N AMERICA

Effects of the Economic Crisis, Adjustment, an c

8.9

1.4

3.4

-7.3

-13.8

Trinidad & Tobago

32b

69b

Uruguay

140

391

338

3.2

1.2

2.3

0.0

-6.7

Venezuela

148

218

161

•

1.8

•

0.7

-19.9

Average

222

352

292

•

•

•

•

Sources: Based on E C L A C 1990a; I D B 1990; World Bank 1991. Notes: a. Worst point. b. Percent of exports only. c. 1989. d. Rio de Janeiro. e. 1988. f. 1977. g. 1984 * Signifies data not available.

-9.6

CRISIS, A D J U S T M E N T / R E S T R U C T U R I N G , S O C I A L C O S T S

T a b l e 1.1

continued

Inflation Rale ( % )

Real W a g e s ( 1 9 8 0 = 1 0 0 )

(December-December) 1980

11

1985

Average

199(1

1985

Urban Unemployment

Minimum

1989

1985

1989

1980

113.1

69.9

87.6

385.4

1832.5

107.2

81.5

16.1

2.4

1.9

104.9

108.6

23.9

8170.5

17.8

96.1

95.6

95.3

228.0

2359.9

112.7d

107.2d

83.9

68.6

31.2

26.4

29.4

93.5

102.9

63.4

63.5

26.5

22.3

31.0

114.6

119.1

108.0

105.0

17.8

11.1

22.4

92.2

85.7

112.2

110.2

4.6

28.4

75.9

79.1

60.8

80.2

77.8

14.5

24.4

48.3

60.8

43.7

5.7

63.4

35.6

•

18.6

30.8

19.9

9.1

31.5

50.1

15.3

17.4

13.2

•

25.3

•

11.5

4.2

28.6

23.9

29.8

63.7

30.2

24.8

334.3

8500.0

14.4

0.4

0.8

8.9

23.1

42.7

17.2C

94.7

•

76.6

•

89.7

•

83.3 •

•

75.8

•

108.3

59.7

158.3

8291.5

77.6

41.5

16.6

6.6

10.8

125.0

89.9

42.8

83.0

129.8

68.1

72.8

19.6

5.7

32.2

•

•

56.1

274.1

1491.5

•

•

•

33.2

•

37.2d

94.0

78.5

88.3

97.6

90.7

74.0

•

67.0

Poverty Incidence

( % of L a b o r F o r c e ) 1 9 8 2 - 1 9 8 6 3 1989

1986-1988

2.6

6.1

7.8

10

16

18.7

16.5

•

•

7.1

8.5

7.0

•

•

6.2

7.1

3.3

45

45

11.7

20.0

7.2

•

•

9.7

14.0

9.6

42

42

6.0

9.9

3.8

24

27

•

•

•

•

•

•

•

7.2

71

73

•

•

•

10.4

2.2 •

14.3

. 14.2 •

8.8

11.7

13.8

12.5

46.9

4.5

6.6

•

1979-1981

10.8

. e

( % of T o t a l P o p u l a t i o n )

13.0 8.7e

•

2.9

40f

•

378

47.3

.

18.3

.

.

.

.

100.8

99.8

10.4

15.7

20.0

42

41

99.4

136.5

3.9

5.1

6.1

54.2

•

•

53

60

•

•

23.2

7.1

10.1

7.9

•

9.9

13.7

•

94.1

78.6

7.4

15.5

8.6

15

20

95.3

77.1

6.6

14.3

9.7

25

32

84.2

75.4

7.3

10.5

8.3

35

37

•

12

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

T h e b u r d e n of a d j u s t m e n t fell d i s p r o p o r t i o n a t e l y o n t h e p o o r , t h e a g e d , w o m e n , a n d t h e y o u n g . T h e n u m b e r of p o o r in Latin A m e r i c a inc r e a s e d 3 4 p e r c e n t f r o m 1 9 8 0 - 1 9 8 9 ( E C L A C 1 9 9 0 b ) . T h e i n c i d e n c e of p o v e r t y rose in 10 c o u n t r i e s f r o m 3 5 p e r c e n t at the end of the 1 9 7 0 s to 3 7 p e r c e n t in 1 9 8 6 - 1 9 8 8 ; in a l m o s t t w o - t h i r d s of t h e m the i n c i d e n c e w a s a b o v e the r e g i o n a l a v e r a g e . T h e s e d a t a e x c l u d e s e v e n of the least d e v e l o p e d c o u n t r i e s , w h e r e p o v e r t y s h o u l d be w o r s e . T h e a d j u s t m e n t - i n d u c e d r e t r e n c h m e n t in p u b l i c e x p e n d i t u r e s f o r social s e r v i c e s ( p a r t i c u l a r l y in the first half of the 1 9 8 0 s ) r e d u c e d t h e s a f e t y net f o r the most v u l n e r a b l e s e g m e n t s of the p o p u l a t i o n . A l t h o u g h s o m e rec o v e r y in o u t l a y s took p l a c e at the e n d of the d e c a d e , there w a s still a red u c t i o n in the overall level of a n d a c c e s s to social s e r v i c e s and a d e t e r i o r a t i o n in their q u a l i t y ( I D B 1 9 9 0 ) . D a t a a v a i l a b l e f o r o n l y 10 L A C c o u n t r i e s s h o w that in 6 0 p e r c e n t of t h e m the s h a r e of central g o v e r n m e n t e x p e n d i t u r e s in s o c i a l s e c u r i t y , w e l f a r e , h e a l t h c a r e , a n d s i m i l a r p u b l i c s e r v i c e s w a s l o w e r in 1 9 8 9 t h a n in 1972 ( W o r l d B a n k 1 9 9 1 ) . B u t if t h e s i t u a t i o n at the end of t h e 1970s ( w h e n e x p e n d i t u r e s w e r e h i g h e r than in 1 9 7 2 ) w e r e c o m p a r e d w i t h the p e r i o d 1 9 8 4 - 1 9 8 5 ( w h e n the c r i s i s w a s w o r s e ) the p i c t u r e w o u l d p r o b a b l y be w o r s e . F o r i n s t a n c e , f r o m 1 9 8 0 1 9 8 5 t h e h e a l t h - c a r e s h a r e of p u b l i c e x p e n d i t u r e s fell f r o m 9 p e r c e n t to 5 . 5 p e r c e n t ; f u r t h e r m o r e , f r o m 1 9 7 8 - 1 9 8 4 p u b l i c health e x p e n d i t u r e s p e r c a p i t a by the central g o v e r n m e n t ( e x c l u d i n g social i n s u r a n c e ) d e c l i n e d in 2 2 o u t of 2 4 L A C c o u n t r i e s ( M u s g r o v e 1986). S c a t t e r e d d a t a f r o m indiv i d u a l c o u n t r i e s c o n f i r m the d e c l i n e in the s h a r e of social s e r v i c e e x p e n d i t u r e s in total c e n t r a l g o v e r n m e n t e x p e n d i t u r e s : C h i l e by - 1 6 . 4 p e r c e n t f r o m 1 9 8 0 - 1 9 8 3 ; C o l o m b i a f r o m 3 9 . 7 p e r c e n t to 3 0 . 1 p e r c e n t f r o m 1984—1988 (social s e c u r i t y p l u s h e a l t h d e c l i n e d f r o m 15.2 p e r c e n t to 12.9 p e r c e n t ) ; C o s t a R i c a f r o m 5 4 . 3 p e r c e n t to 4 1 . 5 p e r c e n t f r o m 1 9 7 9 - 1 9 8 4 ( s o c i a l s e c u r i t y p l u s h e a l t h w e n t f r o m 3 6 . 2 p e r c e n t to 2 6 . 3 p e r c e n t ) ; J a m a i c a f r o m 35.1 p e r c e n t to 2 4 . 2 p e r c e n t f r o m 1 9 7 9 / 8 0 - 1 9 8 5 / 8 6 ( s o c i a l s e c u r i t y p l u s h e a l t h w e n t f r o m 9.1 p e r c e n t to 7 . 8 p e r c e n t ) ; a n d M e x i c o f r o m 2 . 2 p e r c e n t to 0 . 6 p e r c e n t f r o m 1 9 8 1 - 1 9 8 3 ( I D B 1988; M e l l e r 1990; W i l l i a m s o n 1990; B o y d 1 9 8 8 ) . S o m e data on health s t a t u s in L A C (life e x p e c t a n c y , i n f a n t m o r t a l i t y ) s u g g e s t c o n t i n u o u s i m p r o v e m e n t b e t w e e n 1 9 7 0 and 1 9 8 9 . H o w e v e r , this m i g h t b e the r e s u l t of i n a c c u r a c i e s in the d a t a , t o o s h o r t a p e r i o d of o b s e r v a t i o n , or lag t i m e s in r e s p o n d i n g to t h e d e c l i n e in i n v e s t m e n t a n d health-care maintenance ( I D B 1990; World Bank 1991). Furthermore, a c o m p a r i s o n of s u c h i n d i c a t o r s in 1 9 8 0 a n d 1989 m i g h t reveal a d e t e r i o r a tion. A P A H O s t u d y has o f f e r e d e v i d e n c e of w o r s e n i n g health a m o n g v u l n e r a b l e g r o u p s of the p o p u l a t i o n in t e r m s of health i n d i c a t o r s , e.g., a rise in i n f a n t mortality c a u s e d b y d i a r r h e a and e i t h e r an i n c r e a s e in the i n f a n t m o r t a l i t y rate or a s l o w d o w n in the rate of d e c r e a s e ( M u s g r o v e 1 9 8 9 ) .

CRISIS, ADJUSTMENT/RESTRUCTURING, SOCIAL COSTS

13

T h i s c h a p t e r has s h o w n t h e g r a v e d e t e r i o r a t i o n of e c o n o m i c a n d social c o n d i t i o n s in L A C d u r i n g the 1 9 8 0 s . T h e rest of t h i s s t u d y a n a l y z e s t h e i m p a c t of t h e c r i s i s , r e a d j u s t m e n t , a n d r e s t r u c t u r i n g o n s o c i a l s e c u r i t y a n d d i s c u s s e s w a y s that s o c i a l s e c u r i t y can a l l e v i a t e s o c i a l c o s t s w i t h o u t h a r m i n g e c o n o m i c r e c o v e r y in t h e 1 9 9 0 s .

2 Social Security: The Problems of Coping with Social Costs

Historical and Evolutionary Framework A f t e r t h e i n d u s t r i a l i z e d c o u n t r i e s , t h e L A C r e g i o n w a s the f i r s t to introd u c e s o c i a l s e c u r i t y p r o g r a m s , a h e a d of m o s t o t h e r d e v e l o p i n g c o u n t r i e s in A s i a a n d A f r i c a . T a b l e 2.1 s h o w s that the first c o n t i n g e n c y to be c o v e r e d w a s o c c u p a t i o n a l a c c i d e n t s a n d d i s e a s e s : by 1 9 2 0 , 11 L A C c o u n t r i e s had s u c h a p r o g r a m , a n d by 1 9 7 0 o n l y t h r e e c o u n t r i e s — f r o m t h e n o n Latin C a r i b b e a n ( N L C ) — l a c k e d it. T h e t i m i n g of s i c k n e s s / m a t e r n i t y a n d p e n s i o n p r o g r a m s w a s s i m i l a r : by 1 9 5 0 c l o s e to half of t h e c o u n t r i e s had s u c h s c h e m e s in o p e r a t i o n , a n d by 1 9 8 9 all c o u n t r i e s ( w i t h t h e e x c e p t i o n of t w o in t h e C a r i b b e a n c o n c e r n i n g s i c k n e s s / m a t e r n i t y ) h a d i n t r o d u c e d both programs. Family allowances and u n e m p l o y m e n t c o m p e n s a t i o n did not b e g i n until the late 1 9 3 0 s a n d by 1 9 8 9 w e r e f u n c t i o n i n g in o n l y s e v e n c o u n t r i e s (all of t h e m in Latin A m e r i c a , w i t h the e x c e p t i o n of o n e u n e m p l o y m e n t p r o g r a m in t h e N L C ) . In g e n e r a l , s o c i a l s e c u r i t y p r o g r a m s in Latin A m e r i c a a p p e a r e d m u c h e a r l i e r than in the N L C . T h r e e g r o u p s of L A C c o u n t r i e s can be i d e n t i f i e d in t h e p r o c e s s of the h i s t o r i c a l e v o l u t i o n of s o c i a l s e c u r i t y : p i o n e e r , i n t e r m e d i a t e , a n d l a t e c o m e r ( t h i s s e c t i o n is b a s e d on M e s a - L a g o 1 9 8 9 c , 1 9 9 1 b , 1 9 9 1 c ) .

Pioneer

Group

In f i v e L a t i n A m e r i c a n c o u n t r i e s — t h e m o s t d e v e l o p e d of t h e r e g i o n (Chile, Uruguay, Argentina, Cuba, and Brazil, which together account for 15 p e r c e n t of t h e total n u m b e r of L A C c o u n t r i e s ) — p e n s i o n p r o g r a m s w e r e e s t a b l i s h e d in the 1 9 2 0 s a n d 1 9 3 0 s . T h e s e p r o g r a m s o r i g i n a l l y p r o t e c t e d the b e s t - o r g a n i z e d o c c u p a t i o n a l g r o u p s or s e c t o r s of t h e labor f o r c e but g r a d u a l l y i n c o r p o r a t e d w i d e r and less p o w e r f u l g r o u p s ; c u r r e n t l y their p o p u l a t i o n c o v e r a g e is a b o u t 7 0 p e r c e n t o r h i g h e r a n d is v i r t u a l l y u n i v e r sal if n o n c o n t r i b u t o r y p r o g r a m s f o r t h e i n d i g e n t a r e t a k e n i n t o a c c o u n t .

15

16

C H A N G I N G SOCIAL SECURITY IN LATIN AMERICA

Table 2.1

Historical Inception of Social Security Programs in LAC: 1920-1989 (Number of Countries with Programs in Operation) Implementation of First Law

1920

1930

1940

1950

1960

1970

1980

1989

No Program

Occupational Risks

11

19

24

26

28

30

30

30

3a

Sickness/Maternityb

0

2

7

16

19

22

30

32

2a

Old age, Disability/ Survivors

0

4

7

13

16

27

34

34

0

Family A l l o w a n c e s

0

0

1

3

6

7

7

7

26

Unemployment

0

0

1

2

3

5

5

7

26

Programs

Source: Based on U S - S S A 1990 and ISSA 1 9 9 0 - 1 9 9 1 . Notes: a. Excludes S u r i n a m e for lack of data, b. Cash or medical care or both.

C h i l e a n d B r a z i l w e r e a l s o p i o n e e r s in t h e i n t r o d u c t i o n o f s i c k n e s s i n s u r a n c e at a b o u t t h e s a m e t i m e as p e n s i o n s ( a s w e r e C h i l e a n d C u b a in m a t e r n i t y p r o g r a m s ) . B o t h p r o g r a m s w e r e d e l a y e d in A r g e n t i n a a n d U r u g u a y ( a n d s i c k n e s s i n s u r a n c e d e l a y e d in C u b a ) until as late as t h e 1 9 6 0 s , p a r t l y b e c a u s e of t h e s t r o n g d e v e l o p m e n t of h e a l t h c a r e t h r o u g h m u t u a l a i d s o c i e t i e s , c o o p e r a t i v e s , a n d t r a d e u n i o n s . W i t h t h e e x c e p t i o n o f C u b a , all these countries established u n e m p l o y m e n t and family-allowance p r o g r a m s b e t w e e n t h e 1 9 3 0 s a n d 1 9 6 0 s , m o s t of t h e m f o l l o w i n g t h e s a m e p a t t e r n of e v o l u t i o n as t h e o t h e r s c h e m e s . T h e r e f o r e t h e s o c i a l s e c u r i t y s y s t e m s in t h e s e c o u n t r i e s e v o l v e d in a f r a g m e n t e d m a n n e r , l e a d i n g to n u m e r o u s ind e p e n d e n t s u b s y s t e m s (in t e r m s o f b o t h c o v e r e d r i s k s a n d p o p u l a t i o n ) , e a c h w i t h its o w n l a w s , a d m i n i s t r a t i o n , f i n a n c i n g , a n d b e n e f i t s a n d e a c h lacking overall coordination. T h e r e w e r e i m p o r t a n t a n d u s u a l l y u n j u s t i f i e d d i f f e r e n c e s a m o n g all t h e s u b s y s t e m s ( e . g . , in t e r m s of t h e i r d e g r e e s of c o v e r a g e , c o n d i t i o n s f o r e n t i t l e m e n t , b e n e f i t s a v a i l a b l e , s t a t e s u b s i d i e s ) , r e s u l t i n g in c o n s i d e r a b l e stratification. The overall system coverage had a pyramidal shape: relat i v e l y s m a l l g r o u p s w e r e w e l l p r o t e c t e d at t h e a p e x a n d to a l e s s e r e x t e n t at t h e c e n t e r , w h e r e a s t h e m a j o r i t y of t h e p o p u l a t i o n , at t h e b a s e , e n d u r e d t h e w o r s t p r o t e c t i o n . A s g r o u p s in t h e c e n t e r b e c a m e b e t t e r o r g a n i z e d t h e y w e r e a b l e to o b t a i n s o m e b e n e f i t s p r e v i o u s l y r e s e r v e d f o r t h o s e at t h e t o p . T h e c o s t of t h e s e p r o g r a m s b e c a m e e x c e s s i v e — 2 2 - 5 6 p e r c e n t o f w a g e s a n d 9 - 1 1 p e r c e n t of G D P — b e c a u s e of t h e u n i v e r s a l i z a t i o n of c o v e r a g e , t h e g e n e r o u s c o n d i t i o n s a n d b e n e f i t s , m a t u r a t i o n of t h e p e n s i o n p r o g r a m s ( t h e b u l k of s o c i a l s e c u r i t y e x p e n d i t u r e s g o e s to p e n s i o n s ) , a g i n g of t h e p o p u l a t i o n , a n d h i g h l i f e e x p e c t a n c y . A l l of t h e s e f a c t o r s led to a c t u a r i a l a n d f i n a n c i a l i m b a l a n c e s in m a n y s u b s y s t e m s .

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

17

Several technical studies r e c o m m e n d e d the unification and standardization of the s u b s y s t e m s as w e l l as t h e e r a d i c a t i o n of c o s t l y p r i v i l e g e s , b u t t h e n e e d e d r e f o r m w a s b l o c k e d b y t h e p o w e r f u l p r e s s u r e g r o u p s . In the 1 9 6 0 s , 1970s, a n d 1 9 8 0 s political c h a n g e s in the p i o n e e r c o u n t r i e s rei n f o r c e d the p o w e r of the state v i s - à - v i s t h o s e g r o u p s , t h u s f a c i l i t a t i n g the r e f o r m . In C u b a a n d B r a z i l a l m o s t t h e e n t i r e s y s t e m w a s u n i f i e d ; in A r g e n t i n a a n d U r u g u a y a n e w c e n t r a l a g e n c y i n t e g r a t e d or c o o r d i n a t e d the v a r i o u s g r o u p s into a u n i f o r m s y s t e m ; a n d in C h i l e a n e w p r i v a t e s y s t e m w a s c r e a t e d w h i l e m o s t of the r e m a i n s of the o l d s y s t e m w e r e c o o r d i n a t e d and s t a n d a r d i z e d and the old privileges virtually e l i m i n a t e d . C h i l e ' s m o d e l of p r i v a t i z a t i o n has b e e n i n f l u e n t i a l in t h e r e g i o n b u t has not b e e n r e p l i c a t e d in toto so f a r . All c o u n t r i e s in this g r o u p h a v e m o v e d f r o m p a r t i a l l y f u n d e d p e n s i o n p r o g r a m s to p a y - a s - y o u - g o p r o g r a m s a n d a r e h e a v i l y s u b s i d i z e d b y t h e state; C h i l e ' s n e w s y s t e m , h o w e v e r , is f u l l y f u n d e d . T h e c i t e d r e f o r m s o c c u r r e d b e f o r e the e c o n o m i c crisis a n d a d j u s t m e n t / r e s t r u c t u r i n g p o l i c i e s of t h e 1 9 8 0 s , but t h e d e t e r i o r a t i n g f i n a n c i a l c o n d i t i o n s of s e v e r a l of t h e s e p r o g r a m s , c o m b i n e d w i t h the s t a t e i n c a p a c i t y to c o n t i n u e t h e s u b s i d i e s , h a v e m a d e s u c h p r o g r a m s t a r g e t s of the a d j u s t m e n t / r e s t r u c t u r i n g p r o c e s s .

Intermediate

Group

In a s e c o n d g r o u p of n i n e Latin A m e r i c a n c o u n t r i e s ( 2 6 p e r c e n t of L A C c o u n t r i e s , the s e c o n d largest g r o u p ) p e n s i o n a n d s i c k n e s s / m a t e r n i t y prog r a m s w e r e f o u n d e d m o s t l y in the 1940s ( e x c e p t f o r t w o in the m i d - 1 9 3 0 s a n d o n e e a c h in t h e 1 9 5 0 s a n d 1 9 6 0 s ) . A l t h o u g h M e x i c o w a s r e l a t i v e l y i n d u s t r i a l i z e d , the o t h e r i n t e r m e d i a t e - g r o u p c o u n t r i e s h a d p o o r i n d u s t r i a l d e v e l o p m e n t and a p r e d o m i n a n t rural sector: Bolivia, C o l o m b i a , Costa Rica, Ecuador, P a n a m a , Paraguay, Peru, and Venezuela. (The first three launched family allowances p r o g r a m s and t w o — E c u a d o r and recently V e n e z u e l a — u n e m p l o y m e n t p r o g r a m s . ) T h i s g r o u p w a s i n f l u e n c e d by the n e w t r e n d s i n s p i r e d by the I L O and t h e B e v e r i d g e R e p o r t of t h e 1 9 4 0 s a n d tried to a v o i d t h e e r r o r s s u f f e r e d b y t h e p i o n e e r s . In e a c h c o u n t r y a g e n eral i n s t i t u t e w a s c h a r g e d w i t h t h e task of e v e n t u a l l y c o v e r i n g the e n t i r e p o p u l a t i o n , b u t its a c t i o n w a s i n i t i a l l y l i m i t e d to t h e c a p i t a l a n d m a j o r c i t i e s ( c u r r e n t l y p o p u l a t i o n c o v e r a g e r a n g e s f r o m 1 3 - 6 0 p e r c e n t in d i f f e r ent countries). F u r t h e r m o r e , i n d e p e n d e n t p r o g r a m s p r o t e c t i n g the most p o w e r f u l g r o u p s ( p a r t i c u l a r l y f o r p e n s i o n s ) e v o l v e d e i t h e r b e f o r e or a f t e r t h e c r e a t i o n of t h e g e n e r a l s y s t e m . S t i l l , f e w e r i n d e p e n d e n t f u n d s w e r e f o r m e d than in t h e p i o n e e r c o u n t r i e s , s o the d e g r e e of s t r a t i f i c a t i o n in the i n t e r m e d i a t e g r o u p w a s s m a l l e r . C o s t a R i c a w a s o r i g i n a l l y part of this g r o u p ( b e c a u s e its s y s t e m w a s i n t r o d u c e d in t h e 1 9 4 0 s , its p e n s i o n p r o g r a m has not m a t u r e d c o m p l e t e l y , a n d its p o p u l a t i o n is r e l a t i v e l y y o u n g ) , b u t n o w C o s t a R i c a is m o r e like a m e m b e r of the p i o n e e r g r o u p b e c a u s e its p o p u l a t i o n c o v e r a g e is v i r t u a l l y u n i v e r s a l , the f i n a n c i a l b u r d e n of the

18

C H A N G I N G S O C I A L SECURITY I N L A T I N A M E R I C A

s y s t e m is q u i t e h e a v y ( 3 6 p e r c e n t of w a g e s a n d 9 p e r c e n t of G D P ) , a n d the life e x p e c t a n c y of its p o p u l a t i o n is h i g h . B e c a u s e p e n s i o n p r o g r a m s in this g r o u p w e r e i n t r o d u c e d l a t e r , t h e y are less m a t u r e a n d the b u l k of s o c i a l s e c u r i t y e x p e n d i t u r e s g o e s to sickn e s s / m a t e r n i t y . In a d d i t i o n , b e c a u s e of their r e l a t i v e unity a n d u n i f o r m i t y a n d their l o w e r c o v e r a g e of r i s k s a n d p o p u l a t i o n , these s y s t e m s h a v e o n l y r e c e n t l y c o n f r o n t e d t h e f i n a n c i a l d i f f i c u l t i e s of the p i o n e e r s ( t h e i r c o s t s a r e l o w e r : 1 6 - 2 4 p e r c e n t of w a g e s a n d 3 - 4 p e r c e n t of G D P ) . T h e r e f o r e they did not n e e d radical r e f o r m s . N e v e r t h e l e s s , the c o u n t r i e s h e a d i n g this g r o u p ( t h o s e w i t h t h e w i d e s t c o v e r a g e , g r o w i n g m a t u r i t y of p e n s i o n s , a n d h i g h e s t c o s t s ) b e g a n to f a c e f i n a n c i a l p r o b l e m s in the 1980s that w e r e acc e l e r a t e d by t h e e c o n o m i c c r i s i s . All b u t o n e c o u n t r y in this g r o u p u s e t h e s c a l e d p r e m i u m m e t h o d in p e n s i o n s ( o n e u s e s the a l t e r n a t i v e m e t h o d of a s s e s s m e n t of c o n s t i t u e n t c a p i t a l s ) , b u t s o m e ( l i k e Peru a n d M e x i c o ) a r e p r a c t i c a l l y o n p a y - a s - y o u - g o . C u r r e n t l y m o s t of t h e m are e x p e r i e n c i n g actuarial d i s e q u i l i b r i u m , a n d s o m e f a c e f i n a n c i a l i m b a l a n c e in the s h o r t r u n . S t a t e s u b s i d i e s to i n d e p e n d e n t p r o g r a m s in the p u b l i c s e c t o r , g e n e r o u s b e n e f i t s , a n d liberal e n t i t l e m e n t c o n d i t i o n s h a v e been t a r g e t e d by a d j u s t m e n t p o l i c i e s in m o s t of t h e s e c o u n t r i e s .

Latecomer

Group

T h i s g r o u p e m b r a c e s the m a j o r i t y of c o u n t r i e s in L A C (59 p e r c e n t of t h e total), i n c l u d i n g all in the N L C b u t o n l y six in Latin A m e r i c a . C o m m o n c h a r a c t e r i s t i c s are the late i n c e p t i o n of their p r o g r a m s r e l a t i v e to t h e rest of the r e g i o n a n d their r e l a t i v e l y high d e g r e e of unity a n d u n i f o r m i t y . T h e six Latin A m e r i c a n c o u n t r i e s in t h i s g r o u p a r e a m o n g t h e least d e v e l o p e d a n d m o s t rural in t h e r e g i o n : H a i t i , H o n d u r a s , N i c a r a g u a , El S a l v a d o r , G u a t e m a l a , and t h e D o m i n i c a n R e p u b l i c . M o s t of their p e n s i o n p r o g r a m s w e r e f o u n d e d in the late 1 9 6 0 s or early 1970s (but o n e e a c h in t h e 1 9 4 0 s a n d 1 9 5 0 s ) , so t h e y a r e t h e least m a t u r e in the r e g i o n . T h e i r s i c k n e s s / m a t e r n i t y s c h e m e s w e r e l a u n c h e d in the late 1 9 4 0 s a n d 1 9 5 0 s ( H a i t i ' s law h a s not b e e n e n f o r c e d ) and a b s o r b the b u l k of social s e c u r i t y e x p e n d i t u r e s . N o n e of t h e s e c o u n t r i e s has u n e m p l o y m e n t or f a m i l y - a l l o w a n c e p r o g r a m s . T h e g e n e r a l i n s t i t u t e in e a c h c o u n t r y c o v e r s all the ins u r e d ( a l t h o u g h civil s e r v a n t s a n d t h e a r m e d f o r c e s m a y h a v e i n d e p e n d e n t p r o g r a m s ) , b u t p o p u l a t i o n c o v e r a g e is v e r y l o w : it r a n g e s f r o m 4—13 p e r cent, e x c e p t f o r o n e c a s e of 3 8 p e r c e n t c o v e r a g e . F u r t h e r m o r e , e n t i t l e m e n t c o n d i t i o n s in this s u b g r o u p t e n d to be the strictest in the r e g i o n , b e n e f i t s the m o s t f r u g a l , p o p u l a t i o n t h e y o u n g e s t , a n d life e x p e c t a n c y t h e l o w e s t . B e c a u s e of t h e s e f a c t o r s t h e b u r d e n of s o c i a l s e c u r i t y f i n a n c i n g is r e l a t i v e l y light ( 1 1 - 1 8 p e r c e n t of w a g e s a n d 1 - 2 p e r c e n t of G D P ) , a n d t h e m a j o r i t y of c o u n t r i e s in this g r o u p did not f a c e s e r i o u s f i n a n c i a l d i f f i c u l ties until r e c e n t l y . T h e i r m a j o r p r o b l e m is d e t e r m i n i n g h o w to e x t e n d p o p ulation c o v e r a g e ; a f e w of t h e m (e.g., N i c a r a g u a , G u a t e m a l a ) h a v e m a d e

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

19

significant e f f o r t s to achieve that goal. Pension p r o g r a m s in these c o u n tries tend to use scaled p r e m i u m m e t h o d s , but there is not enough information to determine whether some of them are shifting to a pay-as-you-go approach. In any case the economic crisis of the 1980s, aggravated by severe political instability in some cases, has induced actuarial disequilibrium and financial problems in several of these programs. The N L C s u b g r o u p is m a d e up of 14 c o u n t r i e s that won their independence in the 1960s and 1970s. They have v a r y i n g levels of development but are usually ahead of their Latin A m e r i c a n c o u n t e r p a r t s ; s o m e even surpass the level of countries in the intermediate group. Practically all of these countries established a national health-care system prior to independence (following the British m o d e l ) and social insurance programs thereafter (including pensions and cash b e n e f i t s for sickness/maternity in most of them). Many of these systems s h o w similarities with Costa Rica: recent establishment of pensions, universal population coverage, relatively young populations, and high life e x p e c t a n c y . C o n v e r s e l y , b e c a u s e the N L C systems are even newer, their b e n e f i t s usually meager, and investment more efficient than Costa R i c a ' s , these N L C systems exhibit s o m e different features: their contributory b u r d e n is lighter ( 5 - 1 4 percent of wages), their costs are lower, and some e n j o y a sounder financial status. However, the economic crisis and recent liberal social security policies in some of them have created financial difficulties.

Major Problems Faced by Social Security This section reviews the problems that L A C ' s social security systems confronted in the 1980s and discusses how they have been aggravated by the e c o n o m i c crisis and reform. S p e c i f i c p r o b l e m s to be analyzed herein are (1) poor population coverage and lack of protection for the informal and rural sectors, the u n e m p l o y e d , and other v u l n e r a b l e g r o u p s ; (2) b u r d e n s o m e and regressive contributions, c o m p o u n d e d with noncompliance; (3) inefficient investment policies that have c o n t r i b u t e d to the decapitalization of funds; (4) liberal and unequitable benefits that ultimately had to be curtailed; (5) high and increasing health-care costs; (6) heavy administrative expenditures and other managerial deficiencies; and (7) worsening actuarial and financial deficits. T h e s e p r o b l e m s m a d e social security increasingly unable to cope with social costs and eventually led to the crisis and the urgent need for reform.

Poor Coverage and Difficulties

in Extending

It

Low population coverage and negative effects of the economic crisis and reform. In half of Latin America the social insurance sickness/maternity

20

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

s c h e m e c o v e r s all the salaried e m p l o y e d labor force, w h e r e a s in the other half it c o v e r s only s o m e of the e m p l o y e e s , usually those in the p u b l i c sector and in industry, m i n i n g , c o m m e r c e , and financial services, e x c l u d i n g agriculture. In C u b a and N i c a r a g u a all residents are c o v e r e d , and in C h i l e and Costa Rica virtually the w h o l e p o p u l a t i o n is c o v e r e d (through a c o m b i n a t i o n of social insurance and w e l f a r e p r o g r a m s ) , except for those w i t h high i n c o m e s w h o d o not w o r k . In the rest of Central A m e r i c a the statutory coverage is normally limited to the capital and the larger cities. In 13 c o u n t r i e s the law protects the s e l f - e m p l o y e d (with c o m p u l s o r y protection in only f o u r and voluntary in nine), in 12 c o u n t r i e s d o m e s t i c servants are c o v e r e d ( c o m pulsorily in nine), and practically all countries c o v e r the d e p e n d e n t s of insured p e r s o n s ( n o r m a l l y the w i f e or c o m m o n - l a w w i f e and children, e x c e p t in Haiti and E c u a d o r ) and p e n s i o n e r s . In virtually all of the N L C (plus C u b a and N i c a r a g u a ) all residents have the legal right to medical and hospital care under either a national health s y s t e m or the public health sector. In addition, social insurance p r o v i d e s m o n e t a r y b e n e f i t s f o r s i c k n e s s / m a t e r n i t y in all but f o u r countries. H o w e v e r , the law g r a n t s m o n e t a r y b e n e f i t s to the selfe m p l o y e d in only six c o u n t r i e s ( c o m p u l s o r i l y in f o u r ) and to d o m e s t i c servants in f i v e countries. L e g a l c o v e r a g e f o r o t h e r r i s k s is m o r e r e s t r i c t e d . All s a l a r i e d e m p l o y e e s are l e g a l l y c o v e r e d by p e n s i o n s in a l m o s t t w o - t h i r d s of t h e 3 4 c o u n t r i e s in L A C , but o n l y s o m e of t h e m a r e c o v e r e d in the r e m a i n i n g o n e - t h i r d ( o n c e a g a i n , e x c l u d i n g a g r i c u l t u r e ) . In 21 c o u n t r i e s the l a w inc l u d e s the s e l f - e m p l o y e d (but c o m p u l s o r i l y in o n l y nine), a n d in 17 c o u n tries it c o v e r s d o m e s t i c s e r v a n t s as w e l l ( c o m p u l s o r i l y in 15). In e i g h t c o u n t r i e s the n o n i n s u r e d p o p u l a t i o n is e l i g i b l e f o r w e l f a r e (i.e., n o n c o n tributory p e n s i o n s ) , c o m p u l s o r i l y in six of t h e m . For o c c u p a t i o n a l r i s k s 18 L A C c o u n t r i e s p r o v i d e c o v e r a g e to all s a l a r i e d e m p l o y e e s a n d 12 to o n l y s o m e of t h e m ( a g r i c u l t u r e a n d m i c r o e n t e r p r i s e s a r e u s u a l l y e x c l u d e d ) . O n l y e i g h t c o u n t r i e s c o v e r d o m e s t i c s e r v a n t s a n d s e v e n the s e l f - e m p l o y e d (but c o m p l e t e l y a n d c o m p u l s o r i l y in o n l y t w o ) . U n e m p l o y m e n t c o m p e n s a t i o n p r o g r a m s , a v a i l a b l e in s e v e n c o u n t r i e s , c o v e r all s a l a r i e d e m p l o y e e s in only t w o c o u n t r i e s a n d o n l y s o m e in t h e rest; the s e l f - e m p l o y e d a n d d o m e s t i c s e r v a n t s are a l w a y s e x c l u d e d , as are a g r i c u l t u r a l w o r k e r s in t w o c o u n t r i e s . F a m i l y a l l o w a n c e s (in s e v e n c o u n t r i e s ) c o v e r all s a l a r i e d e m p l o y e e s in f i v e c o u n t r i e s , but t h e s e l f - e m p l o y e d a n d d o m e s t i c s e r v a n t s are e x c l u d e d ( t h o u g h the latter a r e i n c l u d e d in o n e c o u n t r y ) . T a b l e 2 . 2 s u m m a r i z e s t h e legal e x c l u s i o n of six i m p o r t a n t g r o u p s of w o r k e r s f r o m s i c k n e s s / m a t e r n i t y ( t h e p r o g r a m w i t h t h e largest c o v e r a g e ) . T h e u n e m p l o y e d a n d f a m i l y w o r k e r s a r e e x c l u d e d in all c o u n t r i e s b u t o n e ; the s e l f - e m p l o y e d , d o m e s t i c servants, and t e m p o r a r y / c a s u a l workers are e x c l u d e d in half of the c o u n t r i e s ; a n d rural s a l a r i e d w o r k e r s are e x c l u d e d in t w o - f i f t h s of t h e c o u n t r i e s . B e c a u s e m o s t a g r i c u l t u r a l w o r k is not s a l a r i e d and p e r m a n e n t (but r a t h e r s e a s o n a l , s e l f - e m p l o y e d , etc.) the b u l k

21

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

Table 2.2

Groups of Workers Not Legally Covered by Social Insurance in LAC: 1987-1988 ( N u m b e r of Countries) Legally C o v e r e d "

-

— • --

Mandatory

G r o u p s of Workers Unemployed Unpaid Family Self-employed D o m e s t i c Servants Temporary/Casual Rural

Voluntary

0 0 6 14 c lfi 2i>•5 o « T3 • - c w •

M o •' « =5 Q £ "D U

ü

3

• c oo ' o. K

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

31

to 6 7 p e r c e n t of the m i n i m u m w a g e f r o m 1 9 8 3 - 1 9 8 5 . In any e v e n t , b a s e d on t h e law, in 1 9 8 6 the m o n t h l y b e n e f i t w a s e q u i v a l e n t to U . S . $ 3 0 d u r i n g the f i r s t 9 0 d a y s of c o m p e n s a t i o n a n d w a s h a l v e d a f t e r 1 8 0 d a y s . In E c u a d o r o n l y o n e - f o u r t h of the l a b o r f o r c e is c o v e r e d b y social i n s u r a n c e , a n d t h e p r o p o r t i o n of the total u n e m p l o y e d b e n e f i t i n g f r o m this p r o g r a m is p r o b a b l y v e r y s m a l l ; they r e c e i v e a m o n t h l y f i x e d s u m , b u t d a t a a r e l a c k i n g o n w h e t h e r it is s u f f i c i e n t to m a i n t a i n p r e v i o u s l i v i n g s t a n d a r d s or e v e n m e e t b a s i c n e e d s . In U r u g u a y the p r o p o r t i o n of the total u n e m p l o y e d r e c e i v i n g b e n e f i t s i n c r e a s e d f r o m 2 0 p e r c e n t to 3 0 p e r c e n t f r o m the late 1970s to e a r l y 1980s, but d e c l i n e d to 10 p e r c e n t by 1 9 8 5 , a n d the b e n e f i t w a s well b e l o w the m i n i m u m w a g e ; daily w o r k e r s are e n t i t l e d to an e v e n s m a l l e r c o m p e n s a t i o n , a n d the n u m b e r of a p p l i c a n t s is v i r t u a l l y nil. T h e r e is n o i n f o r m a t i o n a v a i l a b l e on c o v e r a g e in V e n e z u e l a . All but o n e of t h e s e p r o g r a m s r e q u i r e f r o m o n e to t h r e e y e a r s of p r e v i o u s i n s u r a n c e , e m p l o y m e n t , or c o n t r i b u t i o n s to e n t i t l e a w o r k e r to the b e n e f i t s , a f a c t that c o n s i d e r a b l y l i m i t s e l i g i b i l i t y . In t w o c o u n t r i e s w o r k e r s i n v o l v e d in a s t r i k e are not e l i g i b l e f o r t h e s e b e n e f i t s ( I D B 1987; D i x o n a n d S c h e u r e l l 1990; M e l l e r 1990). M o r e w i d e s p r e a d t h a n u n e m p l o y m e n t i n s u r a n c e / a s s i s t a n c e in L A C are p r o g r a m s e s t a b l i s h e d by labor l e g i s l a t i o n that, in a d d i t i o n to p r o t e c t i o n a g a i n s t u n j u s t i f i e d d i s m i s s a l s , p r o v i d e s e v e r a n c e pay or l u m p s u m s at dism i s s a l , u s u a l l y f i n a n c e d by t h e e m p l o y e r . S o m e c o u n t r i e s that h a v e this program are Argentina, B a r b a d o s , Bolivia, Brazil, C o l o m b i a , Honduras, Mexico, Panama, Peru, and Venezuela ( U S - S S A 1990; Bronstein 1990). In m o s t c a s e s t h e s e v e r a n c e p a y m e n t s c a n b e s i m u l t a n e o u s l y c o l l e c t e d w i t h i n s u r a n c e b e n e f i t s ( B r a z i l is an e x c e p t i o n ) . F i n a l l y , t h e r e a r e or h a v e b e e n s p e c i a l e m p l o y m e n t p r o g r a m s in B r a z i l , C h i l e , C o s t a R i c a , P a n a m a , and P e r u ; m o r e m o d e s t or t e m p o r a r y p r o g r a m s o p e r a t e in o t h e r c o u n t r i e s . T h e s e a r e f i n a n c e d by t h e s t a t e , a n d t h e b e n e f i c i a r y m u s t b e e n g a g e d in p r o d u c t i v e w o r k . In g e n e r a l , t h e s e p r o g r a m s are g o o d in r e c e s s i o n p e r i o d s a n d are r a p i d , f l e x i b l e , a n d t a r g e t e d to t h e n e e d i e s t ( I D B 1 9 8 7 ) . At first g l a n c e the cost of u n e m p l o y m e n t i n s u r a n c e / a s s i s t a n c e in L A C d o e s not s e e m to be e x c e s s i v e . In 1983, in t h e m i d s t of the crisis, the p r o p o r t i o n s of total b e n e f i t e x p e n d i t u r e s s p e n t o n t h e p r o g r a m s w e r e r e l a t i v e l y s m a l l — 3 . 2 p e r c e n t in B a r b a d o s , 3 . 6 p e r c e n t in C h i l e , 4 . 5 p e r c e n t in U r u g u a y , a n d 5 . 7 p e r c e n t in E c u a d o r — a n d by 1 9 8 6 t h e s e p e r c e n t a g e s had d e c l i n e d in m o s t c o u n t r i e s ( I L O 1988, 1 9 9 1 a ) . S u c h l o w p e r c e n t a g e s are e x p l a i n e d by t h e s i g n i f i c a n t l i m i t a t i o n s in c o v e r a g e , level of b e n e f i t s , a n d e n t i t l e m e n t c o n d i t i o n s . But d a t a a v a i l a b l e f r o m t w o c o u n t r i e s ( B a r b a d o s a n d U r u g u a y ) i n d i c a t e that c o s t s h a v e risen s i g n i f i c a n t l y , and s u c h e x p e r i e n c e is i m p o r t a n t f o r o t h e r L A C c o u n t r i e s . In B a r b a d o s t h e cost of t h e p r o g r a m i n c r e a s e d t w o - f o l d in e a c h y e a r of t h e 1 9 8 3 - 1 9 8 6 p e r i o d f o r t h e f o l l o w i n g r e a s o n s : ( 1 ) an i n c r e m e n t of o p e n u n e m p l o y m e n t f r o m 1 0 . 8 p e r c e n t in 1981 to 1 8 . 7 p e r c e n t in 1 9 8 5

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C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

( t h e r a t e d e c l i n e d to 1 7 . 9 p e r c e n t in 1 9 8 7 a n d 16.5 p e r c e n t in 1 9 8 9 but w a s still c o n s i d e r a b l y h i g h e r t h a n in 1 9 8 1 , b e f o r e the p r o g r a m b e g a n ) ; (2) a t w o - f o l d e x p a n s i o n of the p a y m e n t p e r i o d , f r o m 13 to 2 6 w e e k s ; a n d (3) an i n c r e a s e in t h e r a t e of s a l a r y r e p l a c e m e n t f r o m 4 0 p e r c e n t to 6 0 p e r c e n t . T h e last t w o m e a s u r e s w e r e t a k e n in 1 9 8 5 at the t i m e the u n e m p l o y m e n t r a t e p e a k e d , in t h e m i d s t of an e l e c t o r a l c a m p a i g n ; in a d d i t i o n , the c o n t r i b u t i o n rate w a s cut in h a l f . T h e u n e m p l o y m e n t s h a r e of total b e n e fit e x p e n d i t u r e s i n c r e a s e d f r o m 3 . 2 p e r c e n t to 1 4 . 2 p e r c e n t f r o m 1 9 8 3 - 1 9 8 6 , t h u s b e c o m i n g the l a r g e s t a f t e r p e n s i o n s . T h e p r o g r a m g e n e r a t e d a s u r p l u s f r o m 1 9 8 2 - 1 9 8 5 , but it o p e r a t e d at a d e f i c i t in 1 9 8 6 that w a s p r o j e c t e d to i n c r e a s e t w o - f o l d in 1 9 8 7 ; t h e r e s e r v e s of the p r o g r a m d e c l i n e d 14 p e r c e n t in 1 9 8 6 (in n o m i n a l t e r m s ) a n d w e r e e x p e c t e d to be d e p l e t e d by 1990. T o c u t c o s t s a n d m i n i m i z e p a y m e n t s to p e r s o n s w h o h a v e r e t u r n e d to w o r k , the b e n e f i t p e r i o d h a s b e e n r e d u c e d f r o m 2 6 w e e k s to t w o w e e k s ( M e s a - L a g o 1 9 8 7 a ; I S S A 1 9 9 0 ) . In U r u g u a y in 1 9 8 2 , a f t e r t h e u n e m p l o y m e n t p r o g r a m w a s g e n e r a l ized, the n u m b e r of u n e m p l o y e d w o r k e r s r e c e i v i n g b e n e f i t s r e a c h e d a hist o r i c p e a k of 2 4 , 5 4 6 in the m o n t h of D e c e m b e r ; t h e n u m b e r d e c l i n e d to 9 , 0 0 2 in 1 9 8 6 as u n e m p l o y m e n t d e c l i n e d b u t r o s e a g a i n to 1 4 , 2 3 6 in 1990, a l t h o u g h t h e n u m b e r of j o b l e s s w o r k e r s d e c l i n e d s l i g h t l y . T h e d e f i c i t in the p r o g r a m r e a c h e d a p e a k in 1 9 8 2 e q u i v a l e n t to 0 . 4 p e r c e n t of G D P ; in real p e s o s the d e f i c i t d e c l i n e d to 0.1 p e r c e n t of G D P in 1 9 8 6 but r o s e a g a i n to 0 . 2 p e r c e n t in 1 9 9 0 ( B P S 1 9 8 6 - 1 9 9 0 ) . In v i e w of the f e w e x i s t i n g p r o g r a m s ( t h e m a j o r i t y of w h i c h are in the m o s t d e v e l o p e d L A C c o u n t r i e s ) , their l o w c o v e r a g e a n d level of b e n e f i t s , and relatively high c o s t s , o n e has to q u e s t i o n if it is f e a s i b l e a n d a d v i s a b l e to e x p a n d u n e m p l o y m e n t i n s u r a n c e to o t h e r L A C c o u n t r i e s or to c u r r e n t l y e x c l u d e d s e c t o r s of the labor f o r c e in t h o s e c o u n t r i e s that a l r e a d y h a v e the s c h e m e in o p e r a t i o n . T h e d i f f i c u l t i e s of e x p a n d i n g in the m i d s t of a crisis a r e h i g h l i g h t e d by t h e f a c t that o n l y t w o p r o g r a m s h a v e e f f e c t i v e l y b e e n i m p l e m e n t e d in t h e last 10 y e a r s . L e g i s l a t i o n e n a c t e d in A r g e n t i n a to e x p a n d c o v e r a g e h a s not b e e n e n f o r c e d , a n d in V e n e z u e l a a l a w p a s s e d in 1985 w a s not put in f o r c e until n e w l e g i s l a t i o n w a s e n a c t e d in 1989. S o m e c o u n t r i e s h a v e f a i l e d in an a t t e m p t to a d d u n e m p l o y m e n t i n s u r a n c e to t h e i r s o c i a l s e c u r i t y s y s t e m s . In C o s t a R i c a f r o m 1 9 8 2 - 1 9 8 3 , w h e n the u n e m p l o y m e n t rate r e a c h e d a historic peak, there were three legal d r a f t s to c r e a t e u n e m p l o y m e n t c o m p e n s a t i o n that w a s to be f i n a n c e d by an a d d i t i o n a l 8 p e r c e n t w a g e c o n t r i b u t i o n p a i d e x c l u s i v e l y by the e m p l o y e r s ; t h e f e a r of a n e g a t i v e i m p a c t o n e m p l o y m e n t , c o m b i n e d w i t h o p position from employers, some political leaders, and the World Bank ( w h i c h at the t i m e w a s n e g o t i a t i n g a s t r u c t u r a l a d j u s t m e n t loan), led to t h e d e f e a t of t h e s e d r a f t s in t h e N a t i o n a l A s s e m b l y . In t h e B a h a m a s a n d J a m a i c a t h e r e w e r e d e b a t e s in t h e 1 9 8 0 s o n this i s s u e : g o v e r n m e n t o f f i c i a l s a n d e m p l o y e r s a r g u e d that u n e m p l o y m e n t w a s t o o h i g h , c h r o n i c , a n d

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s e a s o n a l a n d that c o s t s w o u l d b e e x c e s s i v e a n d i m p o s s i b l e to f i n a n c e in the m i d s t of the c r i s i s . T h e y a r g u e d that it w a s b e t t e r to u s e s c a r c e res o u r c e s to p r o m o t e e m p l o y m e n t c r e a t i o n ; c o n v e r s e l y , s o m e u n i o n l e a d e r s s u p p o r t e d u n e m p l o y m e n t i n s u r a n c e b u t u n d e r tight c o n d i t i o n s to r e d u c e c o s t s . N o l e g i s l a t i v e a c t i o n w a s t a k e n ( M e s a - L a g o 1 9 8 3 a , 1987a). In g e n e r a l , the p a r a l y s i s of u n e m p l o y m e n t p r o g r a m s in L A C m a y be e x p l a i n e d by the d i f f e r e n c e s in e c o n o m i c a n d l a b o r c o n d i t i o n s b e t w e e n most L A C countries and market industrialized e c o n o m i e s . U n e m p l o y m e n t i n s u r a n c e w a s c r e a t e d in i n d u s t r i a l i z e d c o u n t r i e s to c o p e w i t h a c y c l i c a l , s h o r t - t e r m p h e n o m e n o n d u r i n g a r e c e s s i o n , to h e l p b r e a k the b u s i n e s s c y c l e , a n d to s u s t a i n the level of w o r k e r s ' d e m a n d s by m a i n t a i n ing p a r t of their i n c o m e . R e c e n t r e c e s s i o n s in d e v e l o p e d c o u n t r i e s h a v e b e e n c h a r a c t e r i z e d by h i g h e r u n e m p l o y m e n t rates and l o n g e r j o b l e s s periods. T h e s e c h a n g e s h a v e led to a lively d e b a t e a n d to r e v i s i o n s of the existing p r o g r a m s in an a t t e m p t ( w h e t h e r s u c c e s s f u l o r n o t ) to s u p p o r t e c o n o m i c r e c o v e r y a n d j o b c r e a t i o n a n d to c u r t a i l u n e m p l o y m e n t ( I L O 1 9 8 6 - 1 9 8 7 ) . But in L A C u n e m p l o y m e n t is m o r e t y p i c a l l y a s t r u c t u r a l p h e n o m e n o n : it a f f e c t s a larger p r o p o r t i o n of the labor f o r c e a n d c o n t i n ues f o r m u c h l o n g e r p e r i o d s of t i m e t h a n in i n d u s t r i a l i z e d c o u n t r i e s bec a u s e of h i g h e r p o p u l a t i o n g r o w t h r a t e s , g r e a t e r r u r a l - t o - u r b a n m i g r a t i o n , and the inability of the i n d u s t r i a l s e c t o r to a b s o r b the l a b o r s u r p l u s . F u r t h e r m o r e , the a g g r a v a t i o n of u n e m p l o y m e n t in L A C in t h e 1 9 8 0 s w a s m o r e s e v e r e a n d l o n g e r l a s t i n g than in the d e v e l o p e d w o r l d ; it w a s l a r g e l y i n d u c e d by the p r o l o n g e d c r i s i s a n d t h e a d j u s t m e n t / r e s t r u c t u r i n g of t h e L A C e c o n o m i e s . T h e m o s t s i g n i f i c a n t d i f f e r e n c e is that in L A C , s e a s o n a l u n e m p l o y m e n t , u n d e r e m p l o y m e n t , a n d i n f o r m a l e m p l o y m e n t a r e by f a r m o r e i m p o r t a n t than o p e n u n e m p l o y m e n t . B e f o r e the c r i s i s i n f o r m a l e m p l o y m e n t a c c o u n t e d f o r an a v e r a g e of 7 p e r c e n t of the labor f o r c e in Latin A m e r i c a ; u n d e r e m p l o y m e n t r a n g e d f r o m 2 0 - 2 9 p e r c e n t , a n d the i n f o r m a l sector w a s e s t i m a t e d to be 24 p e r c e n t of the regional urban labor f o r c e and as high as 4 0 - 6 0 p e r c e n t in the c a p i t a l s or m a j o r cities of 10 c o u n t r i e s . A s n o t e d e a r l i e r , the crisis led to a n o t a b l e e x p a n s i o n of b o t h u n d e r e m p l o y ment and informal e m p l o y m e n t ( I L O 1976; T o k m a n 1986; I D B 1987; M e s a - L a g o 1 9 9 0 ) . W o r k e r s a f f e c t e d by t h e s e p h e n o m e n a ( e . g . , s e l f e m p l o y e d , w a g e e a r n e r s in c l a n d e s t i n e m i c r o e n t e r p r i s e s , s u b s i s t e n c e f a r m ers) are not u s u a l l y c o v e r e d by s o c i a l s e c u r i t y . A n o t h e r p r o b l e m is that a g o o d part of the u n e m p l o y e d in L A C are y o u n g n e w e n t r a n t s in the l a b o r f o r c e a n d that e x i s t i n g p r o g r a m s e x c l u d e t h e m f r o m any b e n e f i t s . T h e r e f o r e u n e m p l o y m e n t i n s u r a n c e not o n l y is r e s t r i c t e d w i t h i n the f o r m a l s e c tor b u t o b v i o u s l y c a n n o t a l l e v i a t e t h e p r e d i c a m e n t of m o s t of t h e l a b o r force. T h e I L O has a c k n o w l e d g e d that social p r o t e c t i o n m u s t be a d a p t e d to e c o n o m i c c o n d i t i o n s in d i f f e r e n t c o u n t r i e s a n d to t h o s e c o u n t r i e s ' c a p a c i ties to p r o v i d e p r o d u c t i v e e m p l o y m e n t to t h e a v a i l a b l e l a b o r f o r c e ; h e n c e ,

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it s h o u l d not be s u r p r i s i n g — t h e I L O e x p l a i n s — t h a t u n e m p l o y m e n t p r o g r a m s a r e a b s e n t in d e v e l o p i n g c o u n t r i e s d e s p i t e the e x p a n s i o n of o t h e r b r a n c h e s of social s e c u r i t y ( I L O 1 9 8 6 - 1 9 8 7 ) . In a d d i t i o n , t h e I S S A , in a v o l u m e d e v o t e d to u n e m p l o y m e n t a n d s o c i a l s e c u r i t y p o l i c i e s in i n d u s t r i a l i z e d c o u n t r i e s , has n o t e d the i n s u f f i c i e n c y of t r a d i t i o n a l u n e m p l o y m e n t i n s u r a n c e w h e n t r y i n g to c o p e w i t h m a s s i v e l o n g - t e r m u n e m p l o y m e n t in developing countries (ISSA 1985). T h e l o n g d e b a t e o n w h e t h e r e m p l o y e r s ' c o n t r i b u t i o n s to s o c i a l s e c u rity h a v e a n e g a t i v e e f f e c t on j o b c r e a t i o n h a s not y i e l d e d c o n c l u s i v e results; h o w e v e r , industrialized countries have recently stabilized or even r e d u c e d s u c h c o n t r i b u t i o n s in an a t t e m p t to p r e c l u d e the s u b s t i t u t i o n of capital f o r labor. An e x p a n s i o n of u n e m p l o y m e n t i n s u r a n c e in L A C w o u l d result in an i n c r e a s e in c o n t r i b u t i o n s that a r e a l r e a d y high in s o m e c o u n tries. It has b e e n a r g u e d , a l t h o u g h not p r o v e n , that in L A C t h e e m p l o y e r s ' c o n t r i b u t i o n s (if a c t u a l l y p a i d by t h e e m p l o y e r ) r e d u c e the f o r m a l s e c t o r f u r t h e r and s t i m u l a t e the e x p a n s i o n of i n f o r m a l e m p l o y m e n t , t h e r e b y leading to a d o u b l e d e c r e a s e in s o c i a l s e c u r i t y c o v e r a g e ( s e e t h e d e b a t e in M e s a - L a g o 1985, 1989c). A n o p p o s i t e r e a c t i o n by e m p l o y e r s ( r e p o r t e d in B a r b a d o s ) , p a r t i c u l a r l y in s m a l l e n t e r p r i s e s , is to i n c r e a s e n o n c o m p l i a n c e (i.e., e v a s i o n , p a y m e n t d e l a y s ) ; p r o s e c u t i o n of v i o l a t o r s is d i f f i c u l t b e cause trade unions and social security institutions fear enterprise shutd o w n s m o r e than a loss of r e v e n u e ( M e s a - L a g o 1987a). U n e m p l o y m e n t b e n e f i t s in i n d u s t r i a l i z e d c o u n t r i e s are u s u a l l y c o n d i t i o n e d to t h e b e n e f i c i a r y ' s a c c e p t a n c e of r e t r a i n i n g , a n d t h e b e n e f i t s a r e n o r m a l l y w i t h d r a w n w h e n t h e b e n e f i c i a r y r e j e c t s an a d e q u a t e j o b o f f e r . T h e s e c o n d i t i o n s also exist in m o s t L A C c o u n t r i e s w i t h u n e m p l o y m e n t ins u r a n c e , b u t the m a g n i t u d e of u n e m p l o y m e n t in t h o s e c o u n t r i e s m a k e s it d i f f i c u l t to f i n d f o r m a l j o b s ( a l t h o u g h it d o e s p r o m o t e e n t r y into the inf o r m a l s e c t o r ) o r e f f e c t i v e l y r e t r a i n t h e b e n e f i c i a r y . O t h e r o b s t a c l e s include poor-quality e m p l o y m e n t services and p l a c e m e n t o f f i c e s and the d i f f i c u l t y in s u p e r v i s i n g i n v o l u n t a r y u n e m p l o y m e n t ( I L O 1 9 8 6 - 1 9 8 7 ) . L a s t b u t not least is t h e p r o b l e m of h o w to f i n a n c e an e x p a n s i o n of u n e m p l o y m e n t i n s u r a n c e in a c r i s i s s i t u a t i o n . I will s h o w later that t h e w a g e tax b u r d e n in s o m e L A C c o u n t r i e s h a s r e a c h e d u n b e a r a b l e l e v e l s . A n i n c r e a s e in w a g e c o n t r i b u t i o n s to f i n a n c e u n e m p l o y m e n t i n s u r a n c e w o u l d a g g r a v a t e that p r o b l e m . F u r t h e r m o r e , r e v e n u e s w o u l d g o to protect o n l y a s m a l l p e r c e n t a g e of t h e l a b o r f o r c e , a n d t h i s m i g h t h a v e n e g a t i v e effects on e m p l o y m e n t creation. In 1 9 8 6 a q u e s t i o n n a i r e w a s s e n t by t h e I L O to m e m b e r c o u n t r i e s c o n c e r n i n g t h e r e v i s i o n of t h e U n e m p l o y m e n t P r o v i s i o n C o n v e n t i o n of 1934; it i n c l u d e d n u m e r o u s q u e s t i o n s r e l a t e d to the e x p a n s i o n of that p r o g r a m ' s c o v e r a g e and benefits. Only three L A C c o u n t r i e s a n s w e r e d the s u r v e y , a n d t h e y o v e r w h e l m i n g l y s u p p o r t e d e x p a n s i o n , a l t h o u g h t w o of t h e m d i d not a n d still d o not h a v e u n e m p l o y m e n t i n s u r a n c e . N o n e of t h e

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4 7 q u e s t i o n s in the s u r v e y d e a l t w i t h t h e issue of f i n a n c i n g ; t h e last q u e s tion a s k e d f o r any o t h e r p e r t i n e n t i s s u e s not i n c l u d e d in t h e s u r v e y , but in spite of the s e v e r e e c o n o m i c c r i s i s in L A C , the t h r e e r e s p o n d e n t s f r o m the region f a i l e d to note the dearth of f i n a n c i n g ( I L O 1 9 8 6 - 1 9 8 7 ) . F u t u r e I L O s u r v e y s s h o u l d not only deal with the crucial issue of f i n a n c i n g but question the m e m b e r s , particularly d e v e l o p i n g c o u n t r i e s , on o t h e r m o r e u r g e n t priorities in view of the e n o r m o u s p r e s s u r e a s s o c i a t e d with s c a r c e r e s o u r c e s . The inadequate relationship between social insurance and public assistance in protecting disadvantaged groups. B e c a u s e of the s i g n i f i c a n t p r o p o r t i o n of the population not c o v e r e d by social i n s u r a n c e in half of Latin A m e r i c a and the difficulties in e x p a n d i n g c o v e r a g e , the role of public assistance f o r the d i s p o s s e s s e d is crucial, as is the c o o r d i n a t i o n of both types of p r o g r a m s . But only the most d e v e l o p e d c o u n t r i e s of Latin A m e r i c a and s o m e in the N L C have been able to create a c o m b i n e d s y s t e m of insurance and assistance to cover virtually the entire p o p u l a t i o n in t e r m s of both health care and i n c o m e m a i n t e n a n c e (Isuani 1985). T h e r e are f o u r types of s y s t e m s in L A C that o f f e r n o n c a s h health b e n e f i t s : (1) i n t e g r a t e d n a t i o n a l h e a l t h s y s t e m s that c o v e r p r a c t i c a l l y the e n tire p o p u l a t i o n a n d p r o v i d e s i m i l a r t r e a t m e n t to b o t h t h e i n s u r e d a n d the n o n i n s u r e d i n d i g e n t s ( a s f o u n d in t h e N L C , C u b a , a n d N i c a r a g u a ; in all c a s e s the s y s t e m is a d m i n i s t e r e d by the r e s p e c t i v e m i n i s t r y of h e a l t h ) ; ( 2 ) social insurance s i c k n e s s / m a t e r n i t y p r o g r a m s that, with state aid, cover b o t h the i n s u r e d a n d the n o n i n s u r e d i n d i g e n t s w h o p a s s a m e a n s test ( f o u n d in C o s t a R i c a ) ; (3) social i n s u r a n c e w i t h dual s y s t e m s , o n e p r o v i d ing f u l l b e n e f i t s to t h e i n s u r e d a n d a n o t h e r o f f e r i n g p r i m a r y h e a l t h c a r e to d i s a d v a n t a g e d g r o u p s ( u s u a l l y in rural a r e a s ) , w i t h t h e rest of the p o o r cared f o r u n d e r the m i n i s t r y of p u b l i c health ( f o u n d in E c u a d o r , M e x i c o ) ; a n d (4) s e p a r a t i o n of social i n s u r a n c e a n d p u b l i c h e a l t h p r o g r a m s ( f o u n d in m o s t of Latin A m e r i c a ) . T h e level of i n s u r e d b e n e f i t s f o r i n c o m e - m a i n t e n a n c e p r o g r a m s (bas i c a l l y p e n s i o n s ) is u s u a l l y h i g h e r t h a n that u n d e r a s s i s t a n c e p r o g r a m s . T h e r e are f o u r t y p e s of s y s t e m s : ( 1 ) i n t e g r a t e d p r o g r a m s a d m i n i s t e r e d by s o c i a l i n s u r a n c e , f i n a n c e d e i t h e r by s e p a r a t e c o n t r i b u t i o n s f o r i n s u r a n c e and a s s i s t a n c e ( f o u n d in B a r b a d o s ) or by a c o n t r i b u t i o n f o r i n s u r a n c e p l u s state aid ( f o u n d in the B a h a m a s ) , b u t in b o t h c a s e s w i t h a c o m m o n f u n d ; ( 2 ) social i n s u r a n c e a d m i n i s t e r i n g t w o s e p a r a t e p r o g r a m s a n d f u n d s , o n e f i n a n c e d w i t h w a g e c o n t r i b u t i o n s f o r the i n s u r e d a n d a n o t h e r f i n a n c e d by s t a t e t r a n s f e r s f o r t h e d i s p o s s e s s e d ( f o u n d in C o s t a R i c a , U r u g u a y ) ; ( 3 ) separately administered programs, with pensions for the dispossessed m a n d a t e d a n d r e g u l a t e d by l a w ( f o u n d in C h i l e ) ; a n d ( 4 ) s e p a r a t e p r o g r a m s in w h i c h p u b l i c a s s i s t a n c e is l e f t to g o v e r n m e n t d e c i s i o n s ( f o u n d in m o s t of L A C ) . In a d d i t i o n to p e n s i o n s t h e r e a r e p u b l i c a s s i s t a n c e p r o g r a m s a d m i n i s t e r e d by the s t a t e that p r o v i d e m o d e s t g r a n t s to t h e e l d e r l y ,

36

C H A N G I N G SOCIAL SECURITY IN LATIN AMERICA

d i s a b l e d , u n e m p l o y e d , c h i l d r e n , and v i c t i m s of natural d i s a s t e r s , as well as f u n d s f o r n u r s i n g h o m e s , f o o d p r o g r a m s , a n d so f o r t h . T h e r e is v e r y little i n f o r m a t i o n a v a i l a b l e on w h a t p e r c e n t a g e of o v e r all s o c i a l s e c u r i t y b e n e f i t s g o e s to p u b l i c a s s i s t a n c e . T h e I L O t r i a n n u a l s u r v e y p r o b a b l y u n d e r e s t i m a t e s the p e r c e n t a g e b e c a u s e n o n c o n t r i b u t o r y p e n s i o n s f o r health care a r e i n c l u d e d u n d e r the " s o c i a l i n s u r a n c e s a n d ass i m i l a t e d s c h e m e s " c a t e g o r y i n s t e a d of u n d e r p u b l i c a s s i s t a n c e ( e v e n if t h e b e n e f i c i a r y is s u b j e c t e d to a m e a n s test), as a r e public health p r o g r a m s that are u n i v e r s a l a n d b a s e d on a right of t h e p o p u l a t i o n ( I L O 1 9 8 8 ) . Data a v a i l a b l e f o r o n l y six N L C c o u n t r i e s f o r 1 9 8 3 s h o w the f o l l o w i n g s h a r e s of p u b l i c a s s i s t a n c e : 17.6 p e r c e n t f o r S u r i n a m e , 15.7 p e r c e n t f o r J a m a i c a , 7.6 p e r c e n t f o r T r i n i d a d a n d T o b a g o , 7 . 3 p e r c e n t f o r G u y a n a , 6 . 7 p e r c e n t f o r B e l i z e , a n d 5 . 6 p e r c e n t f o r B a r b a d o s ( I L O 1988). T h e f o l l o w i n g p a r a g r a p h s s u m m a r i z e the i n t e g r a t e d but dual p e n s i o n p r o g r a m s of t h e B a h a m a s , B a r b a d o s , C o s t a R i c a , and U r u g u a y , c o u n t r i e s that h a v e a c h i e v e d v i r t u a l l y u n i v e r s a l p o p u l a t i o n c o v e r a g e . ( H e a l t h p r o g r a m s will b e a n a l y z e d in a later s e c t i o n of this c h a p t e r and in C h a p t e r 3.) In the B a h a m a s and B a r b a d o s p u b l i c a s s i s t a n c e w a s i n t r o d u c e d prior to social i n s u r a n c e . In the B a h a m a s the social i n s u r a n c e s y s t e m ( N I B ) w a s put in c h a r g e of b o t h p r o g r a m s in 1 9 7 4 ; t h e p u b l i c a s s i s t a n c e p r o g r a m p r o v i d e s p e n s i o n s ( c o n d i t i o n e d to a m e a n s test) f o r old age, d i s a b i l i t y , and s u r v i v o r s . T h e r e is a g e n e r a l w a g e c o n t r i b u t i o n to the i n s u r a n c e p r o g r a m , a n d the s t a t e a l l o c a t e s a s u m that c o v e r s o n l y a f r a c t i o n of the cost of the a s s i s t a n c e p r o g r a m ; b e c a u s e t h e r e is a c o m m o n f u n d , r e v e n u e s f r o m o t h e r p r o g r a m s are used to c o v e r t h e d e f i c i t , a n d a t r a n s f e r of f u n d s o c c u r s bet w e e n t h e i n s u r e d a n d t h e d i s p o s s e s s e d . It h a s a p r o g r e s s i v e d i s t r i b u t i o n e f f e c t b u t is r e s e n t e d by t h e i n s u r e d a n d c r i t i c i z e d by s o m e g o v e r n m e n t o f f i c i a l s . T h e b u l k of t h e p e n s i o n e r s a r e a s s i s t a n c e c a s e s , but their s h a r e in t h e total n u m b e r d e c l i n e d f r o m 8 7 p e r c e n t to 7 6 p e r c e n t f r o m 1 9 8 1 1985; t h e p e r c e n t a g e of b e n e f i t s g o i n g to this p r o g r a m d e c l i n e d f r o m 6 9 p e r c e n t to 4 6 p e r c e n t in t h e s a m e p e r i o d ; t h e f i x e d a s s i s t a n c e p e n s i o n and t h e m i n i m u m i n s u r a n c e p e n s i o n w e r e at a v e r y s i m i l a r l e v e l in t h e first half of t h e 1 9 8 0 s , b u t t h e g a p b e t w e e n the t w o has e x p a n d e d s i n c e 1985. T h e m e a n s test w a s l i b e r a l i z e d ( w h i c h p r o m p t e d an i n c r e a s e in a s s i s t a n c e c a s e s ) , a n d by 1 9 8 5 the s t a t e c o n t r i b u t i o n c o v e r e d only 11 p e r c e n t of the cost of a s s i s t a n c e ; h e n c e , the e q u i l i b r i u m of the p r o g r a m w a s t h r e a t e n e d . T i g h t e r m e a s u r e s w e r e i n t r o d u c e d ( i n c l u d i n g r e v i s i o n a n d t e r m i n a t i o n of m a n y a s s i s t a n c e p e n s i o n s ) , b u t d a t a a r e l a c k i n g on t h e i m p a c t of t h e s e measures (Mesa-Lago 1987a). In B a r b a d o s t h e p u b l i c a s s i s t a n c e p r o g r a m p r o v i d e s o n l y o l d - a g e pens i o n s . It w a s put u n d e r t h e s o c i a l i n s u r a n c e a d m i n i s t r a t i o n ( N I O ) in 1 9 8 2 a n d is f i n a n c e d b y a s e p a r a t e w a g e c o n t r i b u t i o n (2 p e r c e n t e a c h f r o m the i n s u r e d a n d e m p l o y e r s ) . H o w e v e r , N I O r e v e n u e s a r e not s e g r e g a t e d b y c o n t i n g e n c y a n d a r e c o n s o l i d a t e d in a c o m m o n f u n d . A s s i s t a n c e p e n s i o n s

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

37

w e r e i n i t i a l l y s u b j e c t e d t o a m e a n s test, b u t t h i s test w a s e l i m i n a t e d in 1 9 8 2 w h e n the s t a t u t o r y a g e w a s r e d u c e d a n d t h e level of t h e p e n s i o n inc r e a s e d ( t h e s e m e a s u r e s t o o k p l a c e in the midst of political c a m p a i g n s ) , so t h e n u m b e r of a s s i s t a n c e p e n s i o n e r s b o o m e d . T h e l e v e l s of the f i x e d a s s i s t a n c e p e n s i o n and the m i n i m u m i n s u r a n c e p e n s i o n are s i m i l a r , b u t t h e a v e r a g e i n s u r a n c e p e n s i o n is c o n s i d e r a b l y h i g h e r . F r o m 1 9 8 2 - 1 9 8 4 e x p e n d i t u r e s of the a s s i s t a n c e p r o g r a m e x c e e d e d its c o n t r i b u t i o n s , s o res e r v e s f r o m the c o m m o n f u n d w e r e used to f i n a n c e t h e d e f i c i t . T h i s s i t u ation led to criticism by t h e t r a d e u n i o n s a n d s o m e g o v e r n m e n t a n d social s e c u r i t y o f f i c i a l s . In 1983 the I n t e r n a t i o n a l M o n e t a r y F u n d ( I M F ) r e c o m m e n d e d to s e p a r a t e b o t h p r o g r a m s , but the N I O did not c o m p l y ; the 1985 a c t u a r i a l r e v i e w r e p e a t e d the r e c o m m e n d a t i o n a n d r e q u e s t e d that t h e m e a n s test b e r e s t o r e d . A s e c o n o m i c c o n d i t i o n s i m p r o v e d s o m e w h a t in B a r b a d o s , the n u m b e r of a s s i s t a n c e p e n s i o n s d e c l i n e d slightly; c o n v e r s e l y , the n u m b e r of i n s u r a n c e p e n s i o n e r s a n d t h e level of t h e i r p e n s i o n s r o s e . A s a result the share of a s s i s t a n c e c a s e s in total p e n s i o n s d e c l i n e d f r o m 6 5 p e r c e n t to 5 8 p e r c e n t f r o m 1 9 8 2 - 1 9 8 7 , a n d t h e i r s h a r e of total p e n s i o n b e n e f i t s d e c r e a s e d f r o m 5 3 p e r c e n t to 4 0 p e r c e n t ( M e s a - L a g o 1 9 8 7 a ) . C o v e r a g e of n o n i n s u r e d i n d i g e n t s o n o l d - a g e , d i s a b i l i t y , a n d s u r v i v o r s p e n s i o n s ( c o n d i t i o n e d to a m e a n s t e s t ) w a s i n t r o d u c e d in C o s t a R i c a in 1974 and p l a c e d u n d e r the c o n t r o l of t h e social i n s u r a n c e i n s t i t u t e ( C C S S ) . T h e p e n s i o n a s s i s t a n c e p r o g r a m has a s e p a r a t e f u n d a n d is f i n a n c e d (as is health c a r e f o r a s s i s t a n c e p e n s i o n e r s ) t h r o u g h t r a n s f e r s f r o m the f a m i l y - a l l o w a n c e institute, but if the t r a n s f e r is i n s u f f i c i e n t or d e l a y e d t h e C C S S m u s t t r a n s f e r f u n d s f r o m its o t h e r p r o g r a m s . In 1 9 8 9 t h e p r o p o r t i o n of a s s i s t a n c e p e n s i o n s w a s 4 6 p e r c e n t of all p e n s i o n s , b u t if t h e n u m b e r of p e n s i o n e r s is u s e d f o r the c a l c u l a t i o n ( b e c a u s e t h e r e m a y be s e v e r a l b e n e f i c i a r i e s of o n e p e n s i o n ) the p r o p o r t i o n d e c l i n e s to 3 7 p e r c e n t ; f u r t h e r m o r e , the r a t i o of i n s u r a n c e to a s s i s t a n c e p e n s i o n s w a s 5 to 1. T h e r e f o r e the a s s i s t a n c e s h a r e of total b e n e f i t e x p e n d i t u r e s w a s o n l y 14 p e r c e n t ( M e s a - L a g o 1 9 8 9 c ; C C S S 1989). P u b l i c a s s i s t a n c e p e n s i o n s w e r e e s t a b l i s h e d in U r u g u a y in 1919; c u r rently they cover old age and disability for those w h o lack m e a n s (or w h o s e i n c o m e is l o w e r t h a n t h e o l d - a g e p e n s i o n ) a n d w h o s e c l o s e r e l a t i v e s c a n n o t s u p p o r t t h e m . T h e a s s i s t a n c e p r o g r a m is a b r a n c h of t h e social i n s u r a n c e institute ( B P S ) , but it is f i n a n c e d o u t of g e n e r a l c o n t r i b u t i o n s that a r e i n s u f f i c i e n t to c o v e r e x p e n d i t u r e s , s o t h e s t a t e h a s to s u b s i d i z e the d e f i c i t . T h e s h a r e of a s s i s t a n c e p e n s i o n e r s in the total n u m b e r of p e n s i o n e r s w a s o n l y 9 p e r c e n t in 1 9 9 0 a n d in t e r m s of total b e n e f i t s w a s less than 6 p e r c e n t ; t h e a v e r a g e i n s u r a n c e p e n s i o n is 2 . 6 t i m e s h i g h e r than the assistance pension ( B P S 1990). T a b l e 2 . 6 c o m p a r e s the m a j o r f e a t u r e s of t h e p u b l i c a s s i s t a n c e p r o g r a m s in the f o u r c o u n t r i e s . U r u g u a y ' s p r o g r a m is t h e s m a l l e s t , b u t it is h e a v i l y s u b s i d i z e d by t h e state. C o s t a R i c a ' s p r o g r a m is p r o b a b l y t h e b e s t :

C H A N G I N G SOCIAL SECURITY IN L A T I N A M E R I C A

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SOCIAL SECURITY: COPING WITH SOCIAL COSTS

41

the latecomer g r o u p and in most of the intermediate group, w h e r e a s the developed countries usually have universal coverage and better benefits. B e t w e e n 1980 and 1989/1990, the total percentage contribution in Latin A m e r i c a increased in eight countries, w a s stagnant in eight, and declined in four. Declines took place in Chile, which eliminated the e m p l o y e r contribution in the 1980s (but at the cost of an increasing state subsidy to the old system), and in Bolivia, which cut the e m p l o y e r ' s contribution (but is edging toward financial disequilibrium). T h e majority of the pioneers increased the percentage contribution, w h e r e a s all the latecomers kept it u n c h a n g e d . In t w o - t h i r d s of the L A C c o u n t r i e s in T a b l e 2.7, the p e r c e n t a g e cont r i b u t i o n paid by the i n s u r e d is o n e - t h i r d or less of the total, and in nine c o u n t r i e s the i n s u r e d ' s p e r c e n t a g e r a n g e s b e t w e e n o n e - t h i r d and o n e - h a l f . T h e p r i n c i p a l s o u r c e of f i n a n c i n g is the e m p l o y e r , w h o c o n t r i b u t e s twothirds or m o r e of the total p e r c e n t a g e in 19 c o u n t r i e s a n d f r o m o n e - h a l f to o n e - t h i r d in the rest ( e x c e p t in C h i l e ) . In 5 out of 13 c o u n t r i e s w h e r e the s t a t e c o n t r i b u t e s a p e r c e n t a g e of the p a y r o l l , the p e r c e n t a g e r a n g e s f r o m o n e - t e n t h to o n e - f o u r t h of the total; t h e s e c a l c u l a t i o n s d o not take into a c c o u n t o t h e r s t a t e c o n t r i b u t i o n s . D a t a f r o m 2 6 L A C c o u n t r i e s on the 1 9 8 6 p e r c e n t a g e d i s t r i b u t i o n of s o c i a l i n s u r a n c e p l u s f a m i l y a l l o w a n c e s r e v e n u e s u p p o r t the a b o v e s t a t e m e n t s . A v e r a g e c o n t r i b u t e d s h a r e s f r o m the r e s p e c t i v e s o u r c e s are as f o l l o w s : 25 p e r c e n t f r o m the ins u r e d , 5 3 p e r c e n t f r o m the e m p l o y e r p l u s the state, 19 p e r c e n t f r o m inv e s t m e n t , a n d 3 p e r c e n t f r o m o t h e r s o u r c e s . T h e s e are n o n w e i g h t e d ave r a g e s , but if they had been w e i g h t e d (in t e r m s of p o p u l a t i o n ) the largest c o u n t r i e s (i.e., A r g e n t i n a , Brazil, a n d M e x i c o ) w o u l d h a v e p u s h e d up the p r o p o r t i o n p a i d by the e m p l o y e r p l u s the s t a t e . T h e e m p l o y e r p l u s the state c o n t r i b u t e s m o r e than 6 0 p e r c e n t of total r e v e n u e in eight c o u n t r i e s ( i n c l u d i n g A r g e n t i n a a n d M e x i c o ) a n d f r o m 5 0 - 5 9 p e r c e n t in 12 c o u n tries ( s e e T a b l e 2.8). Regressivity of financing. Contributions appear to have a regressive effect on income distribution: (1) the i n s u r e d ' s contribution is flat, and in 75 percent of the countries there is a contribution ceiling; (2) although there is no conclusive evidence, it appears that the e m p l o y e r ' s contribution is transferred to prices, and the state contribution often c o m e s f r o m regressive taxes; and (3) the state contribution, mainly based on regressive taxes, often subsidizes the cost of protection for the m i d d l e - i n c o m e insured. T h e situation b e c o m e s more inequitable in those countries that have a very low population coverage. For instance, in Honduras the population coverage in 1983 was 10 percent; the insured contributed 2 6 percent of total revenue, and the e m p l o y er and the state together contributed 55 percent. This arrangement suggests a regressive effect on income distribution: 90 percent of the population is not insured (including the lowest-income group), but they may be f i n a n c i n g — through prices and t a x e s — t h e bulk of the benefits for those insured.

42

CHANGING SOCIAL SECURITY IN LATIN AMERICA

Table 2.8

Percentage Distribution of Social Insurance Plus Family Allowances" Revenue b y Sources in LAC: 1986

Countries

Insured

Argentina

31.3

45.6

19.5

3.3

0.3

100.0

Bahamas

26.8

40.7

1.4

30.7

0.5

100.0

Barbados

39.9

41.7

0.0

17.7

0.7

100.0

9.4

56.4

0.0

33.9

0.3

100.0

Bolivia'

25.6

39.4

23.4

8.3

3.2

100.0

Brazil

39.3

52.5

3.9

2.8

1.5

100.0

Chile

30.1

2.0

48.9

18.3

0.7

100.0

Colombia

22.9

52.7

0.0

8.5

15.9

100.0

Costa Rica

25.5

49.2

2.6

11.3

11.3

100.0

0.0

44.3

55.7

0.0

0.0

100.0

Dominica

22.6

50.9

0.0

25.4

1.1

100.0

Ecuador

19.9

15.9

6.0

48.9

9.3

100.0

El Salvador

23.2

52.9

0.0

23.3

0.6

100.0

Grenada

40.4

40.4

0.0

19.0

0.2

100.0

Guatemala

26.8

55.9

0.0

0.0

17.2

100.0

Guyana

15.5

23.2

0.0

61.3

0.0

100.0

Honduras

25.7

46.6

5.9

21.3

0.5

100.0

Jamaica

17.3

21.2

2.8

58.5

0.1

100.0

Mexico

18.1

68.8

7.5

0.0

5.5

100.0

Nicaragua^

22.8

59.9

3.2

12.9

1.2

100.0

Panama

28.1

47.2

3.5

16.0

5.2

100.0

Peru

31.1

68.9

0.0

0.0

0.0

100.0

St. Lucia

28.6

28.6

0.0

42.7

0.0

100.0

Trinidad & Tobago

16.9

33.9

29.9

19.3

0.0

100.0

Uruguay

33.3

37.2

24.0

0.7

4.7

100.0

Venezuela

20.2

40.4

13.2

26.3

0.0

100.0

Regional Average*1

24.8

42.0

11.3

18.9

3.0

100.0

Belize

Cuba b

Employer

State & Taxes

Investment

Others

Total

Sources: ILO 1991a; Mesa-Lago 1991b. Notes: a. Family allowances only in six countries. b. 1983. c. 1985. d. Nonweighted

A l t h o u g h t o c o n f i r m t h i s p o i n t o n e w o u l d n e e d t o d e t e r m i n e w h o really p a y s the s o c i a l s e c u r i t y c o n t r i b u t i o n s , the a b o v e a n a l y s i s q u e s t i o n s t h e w i d e s p r e a d b e l i e f that t h o s e i n s u r e d p a y f o r t h e b u l k o f t h e b e n e f i t s t h e y r e c e i v e a n d that t h e r e s h o u l d t h u s b e a c l o s e c o r r e s p o n d e n c e b e t w e e n contribution and benefit. S u c h distorted v i e w s

have (1) increased

the

o b s t a c l e s s t a n d i n g in t h e w a y o f e x t e n d i n g c o v e r a g e in i n t e r m e d i a t e a n d

SOCIAL SECURITY: C O P I N G WITH SOCIAL COSTS

43

l a t e c o m e r countries with small e m p l o y e d labor f o r c e s (in addition to obstacles o f a structural nature); and ( 2 ) impeded a solution to the pension crisis in pioneer countries, such as Argentina and Uruguay, that requires enormous state subsidies. In only a f e w countries are there transfers from the state budget (or from urban e m p l o y e r s ) to c o v e r marginalized groups not eligible for social security benefits. In M e x i c o the state contributes directly (and the insured and e m p l o y e r s contribute indirectly) to the operation o f the primary h e a l t h - c a r e program f o r marginal rural groups. In B r a z i l the program o f public a s s i s t a n c e f o r health care that c o v e r s the rural sector is f i n a n c e d by taxes on both the payroll o f urban enterprises and the value o f agricultural production. In C o s t a R i c a the state c o n tributes to the h e a l t h - c a r e and pension a s s i s t a n c e programs for the very poor in rural and urban areas. The adverse impact of the economic

crisis on revenues.

T h e crisis and adjust-

ment/restructuring policies o f the 1 9 8 0 s reduced real revenue o f social security (e.g., by 35 percent in M e x i c o from 1 9 8 2 - 1 9 8 8 ) , although the e c o n o m i c recovery o f some countries has led to a positive reversal. Chapter 1 showed that in the vast majority o f L A C countries real average and minimum wages in 1 9 8 9 were below the 1 9 8 0 levels, and rates o f open unemployment and informal employment were considerably higher. T h e j o b l e s s and the informal workers (usually not covered) have ceased to contribute, and those still working are paying less in real terms (in M e x i c o the average real payroll contribution declined 4 2 percent from 1 9 8 2 - 1 9 8 8 ) . Enterprise bankruptcies have closed another source o f contributions. In those countries that impose a ceiling on payroll contributions or where such contributions are fixed according to income brackets, the rapid increase in inflation (without proper adjustments o f ceilings and income brackets) has resulted in a decrease in real contributions.

Inflation

has also adversely

affected real

investment

yields

because most investments and their interests are not indexed (this point is discussed in more detail later). Last but not least, private employers' tax evasion and payment delays (mora),

as well as the state debt, have increased

during the crisis, as discussed below. Evasion,

payment

delays, and state debt.

Increasing rates o f inflation and

hyperinflation in the 1 9 8 0 s have provided an extra incentive to private employers to delay payments to social security because it is more profitable to deposit the money in the bank (which pays a higher interest than the penalty rate charged for mora) and pay later with devalued currency. T h e lack o f indexation o f employers' debts, combined with low interest rates and soft fines imposed on delinquent employers, has stimulated payment delays, and social security revenues have declined. At the end o f the decade the interest (deflated) charged on the debt was negative in many countries: - 6 6 8 percent in Bolivia, - 1 3 4 percent in Peru, and - 5 2 percent in Ecuador. It is not

44

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

surprising, therefore, that both evasion and mora have reached historical peaks in LAC: 23 percent evasion in Argentina, 44 percent mora in Barbados, 60 percent both in Brazil, 44 percent mora in Jamaica, 33 percent evasion in Peru, and 27 percent evasion in Uruguay. In 1982 Costa Rica was collecting 70 percent of expected contributions, and in 1988 Uruguay's contributions comprised 52 percent of estimated total obligations. (Among the self-employed, evasion and mora ranged from 5 2 - 9 6 percent in the Bahamas, Barbados, and Jamaica.) Debt from both causes in the second half of the 1980s reached U.S. $135 million in Colombia, and the debt for mora alone ranged between U.S. $35 million and U.S. $50 million in Ecuador, Guatemala, and Peru. Spiraling inflation has eroded the real value of such debt, e.g., by 85 percent from 1 9 8 5 - 1 9 8 8 in Peru (because of even higher rates of inflation in 1989-1990 the Peruvian debt must have vanished). However, inflation has only aggravated a previous problem resulting from (1) deficient systems of employer registration, payment processing, and individual account tracking; (2) a very large number of microenterprises (many of them informal), each usually hiring only a few w o r k e r s but with enormous aggregate e m p l o y m e n t (these enterprises are difficult to detect, control, and collect f r o m — t h e administrative cost of such an operation often e x c e e d s the revenue collected); (3) a scarcity of skilled inspectors, who receive low salaries that create incentives for f r a u d u l e n t deals with the debtors; (4) the lack of an efficient legal and judicial system to collect contributions and a poor record of prosecution and imprisonment of debtors; and (5) government and union pressure to condone or postpone debts to avoid enterprise bankruptcy and unemployment. Measures to control evasion and late payment have been introduced with mixed results. T h e Bahamas, Barbados, Jamaica, Peru, and Uruguay have tried c o m p u t e r i z i n g registration, payment records (that can be checked against tax records), up-to-date lists of delinquent employers, and other data to identify underpayment or mora. In 1989 Uruguay received a structural a d j u s t m e n t loan ( S A L ) to replace its obsolete and insufficient computer equipment and to train its personnel, and in 1991 it organized a team to fight evasion. Computerization techniques adopted by Peru in the mid-1980s s h o w e d positive results but were largely a b a n d o n e d in 1988 because of their costs and the e c o n o m i c crisis. In Costa Rica private enterprises are required to show certification from the social insurance institute to prove they are up to date in their contribution in order to participate in public bidding or conduct bank transactions (the central government and decentralized institutions must present similar certification to get their budgets approved). Some countries are fixing both interest rates and fines higher than the inflation rate and c o m m e r c i a l interest; others have committed resources to paying the debt and strengthening the inspection system and judicial procedures for collection and execution. The increasing state debt toward social security in many Latin American countries results f r o m the central g o v e r n m e n t and decentralized

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

45

institutions not paying their contributions as e m p l o y e r s and third parties (and in some countries not transferring e m p l o y e e s ' contributions), retaining tax payments collected for social security, and failing to reimburse the cost of services provided by social security on behalf of the state to the dispossessed, civil servants, or military personnel. In the 1980s, under increasing pressure to cut expenditures and satisfy more urgent d e m a n d s (e.g., servicing the external debt), the state debt grew worse and b e c a m e a major factor in the liquidity crisis of social security in several countries. The state debt reached U.S. $73 million in Costa Rica, U.S. $95 million in the D o m i n i c a n Republic, U.S. $170 million in C o l o m b i a (for only the civil servants fund), U.S. $190 million in Guatemala, U.S. $194 million in Peru, and U.S. $602 million in Ecuador. T h e c o m b i n e d state and private debt for mora alone to G u a t e m a l a ' s social security in 1988 was twice the size of the actual revenue collected. In some countries the state has signed a g r e e m e n t s to pay the debt to the social insurance institution. However, both the debt and the interest rate have not been indexed to inflation, so payment is made with devalued currency and the real interest rate is often negative. As a result the real debt has shrunk dramatically; for instance, in Peru it was cut by 99.8 percent f r o m 1 9 8 1 - 1 9 8 8 , and in E c u a d o r it declined by 75 percent from 1 9 7 3 - 1 9 8 5 . In Costa Rica state contributions were reduced in the early 1980s in exchange for payment of the past debt in bonds and punctual state delivery of its contributions (Miranda 1991; Mesa-Lago 1991b; BPS 1979-1991; ISSA 1991). The economic recuperation in some LAC countries since the mid-1980s has led to increases in employment, real wages, and social security revenues; and control of inflation has reduced its pervasive effect on evasion, mora, and the debt. With reasonable stabilization achieved, a few countries (e.g., Costa Rica, Mexico) have raised the payroll contribution and augmented revenue. Chile has perhaps the best record in terms of both economic recuperation and increases in social security revenue; such revenue has also increased in Costa Rica since 1983, although a decrease occurred in 1990. However, many LAC countries are not enjoying such a recovery, and in the future many will endure the consequences of restructuring.

Inefficient

Investment

Policies and

Decapitalization

The importance of investment. The historical importance of investment in financing social insurances in LAC is apparent from Table 2.9. The countries have been clustered by groups (pioneer, intermediate, latecomer) and within each group by date of enactment of the pension programs. The rationale is that, in general, the newer the program the higher the reserves and vice versa. I will deal with two indicators: (1) investment returns, or the annual payoff or yield generated by the invested reserves of a program; and (2) average investment share, or the percentage of program revenue generated by investment

46

C H A N G I N G SOCIAL SECURITY IN LATIN AMERICA

3 Tt ro\ • \c vi • o ^ rr ri rl f> —

x «/-> vi f> o^ o vi \ — — C —X

1

CI f i Ci e, i / i r - O f ì f - ^ f . r- o • x • f i — X t^ a> - ri 0> • Orò fifi

83

84

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

A m o n g the p i o n e e r s , e x p e n d i t u r e s have i n c r e a s e d at a faster rate than r e v e n u e . On the e x p e n d i t u r e side, the r e a s o n s for this p r o b l e m are (1) the u n i v e r s a l e x t e n s i o n of c o v e r a g e ; ( 2 ) e x c e s s i v e l y liberal legislation c o n c e r n i n g b e n e f i t s ; (3) m o r b i d i t y a n d p a t h o l o g y p r o f i l e s typical of d e v e l o p e d c o u n t r i e s ; ( 4 ) p e n s i o n s c h e m e s that h a v e m a t u r e d ; (5) i n c r e a s i n g n u m b e r s of p e n s i o n e r s w h o are l i v i n g longer than w a s e x p e c t e d in both the original legislation and the old actuarial e s t i m a t e s , and w h o are thus r e c e i v i n g p e n s i o n s and h e a l t h - c a r e b e n e f i t s for longer periods; and (6) adj u s t m e n t s to p e n s i o n s and o t h e r b e n e f i t s in line with c h a n g e s in the cost of living. R e v e n u e in the p i o n e e r c o u n t r i e s is b e c o m i n g p r o p o r t i o n a t e l y lower for the f o l l o w i n g r e a s o n s : (1) c o v e r a g e c a n n o t be e x t e n d e d any f u r ther ( a n d if it w e r e it w o u l d be to b r i n g in l o w e r - i n c o m e g r o u p s , w h i c h w o u l d w o r s e n the d i s e q u i l i b r i u m ) ; (2) the n u m b e r of active c o n t r i b u t o r s is s t e a d i l y d r o p p i n g in c o m p a r i s o n with the g r o w i n g n u m b e r of b e n e f i c i a ries; (3) there is a high level of e m p l o y e r tax e v a s i o n and p a y m e n t d e l a y s , p a r t i c u l a r l y in c o u n t r i e s with high and s u s t a i n e d i n f l a t i o n ; (4) the states o f t e n fail to meet their f i n a n c i a l o b l i g a t i o n s , leading to the a c c u m u l a t i o n of very large debts; (5) the c o n t r i b u t i o n b u r d e n of social security is very heavy, and it is very d i f f i c u l t — p o l i t i c a l l y and e c o n o m i c a l l y — t o increase either w a g e c o n t r i b u t i o n s or taxes; and (6) with the e x c e p t i o n of Chile the p i o n e e r c o u n t r i e s lack s u b s t a n t i a l r e s e r v e s and thus do not g e n e r a t e investment revenue. S o m e of the i n t e r m e d i a t e c o u n t r i e s share the a b o v e features with the p i o n e e r s , w h e r e a s others are c l o s e r to the l a t e c o m e r s . But the general financial situation is a g g r a v a t e d by the f o l l o w i n g f a c t o r s : (1) in practically all countries the s i c k n e s s / m a t e r n i t y p r o g r a m s have s u f f e r e d steady d e f i c i t s that have been f i n a n c e d by t r a n s f e r s f r o m the pension p r o g r a m s ; (2) in all countries there are special p r o g r a m s in the public sector that show d e f i c i t s and are s u b s i d i z e d by either the states or the general institutes; and (3) at least t w o of these c o u n t r i e s have s u f f e r e d a liquidity crisis, and the rest either f a c e actuarial d e f i c i t s or h a v e not c o n d u c t e d actuarial b a l a n c e s for a long period. T h e l a t e c o m e r countries e n j o y the best situation b e c a u s e their e x p e n d itures are lower ( f o r r e a s o n s e x p l a i n e d earlier) and their r e v e n u e s can still e x p a n d with i n c r e a s i n g p o p u l a t i o n c o v e r a g e (in the Latin A m e r i c a n g r o u p ) and rising c o n t r i b u t i o n s (in both g r o u p s ) . F u r t h e r m o r e , i n v e s t m e n t p e r f o r m a n c e in the N L C has g e n e r a l l y been better than in Latin A m e r i c a . Scattered data available on the s i c k n e s s / m a t e r n i t y p r o g r a m s of several c o u n t r i e s i n d i c a t e that their d i s e q u i l i b r i u m is w o r s e than that of social security as a w h o l e . T h e reason is that the pension p r o g r a m s usually g e n erate s u r p l u s e s that c o m p e n s a t e and h e l p r e d u c e — t h r o u g h loans or transf e r s — t h e d e f i c i t s f a c e d by the s i c k n e s s / m a t e r n i t y p r o g r a m s . T h e f o l l o w ing i n f o r m a t i o n includes the state c o n t r i b u t i o n as a third party: in M e x i c o the s i c k n e s s / m a t e r n i t y p r o g r a m has a n n u a l l y e n d e d in deficit s i n c e its

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

85

c r e a t i o n in 1 9 4 3 , e x c e p t f o r t h r e e y e a r s ; in P a n a m a t h e r e h a s b e e n a s t e a d y d e f i c i t s i n c e 1 9 7 5 t h a t r e a c h e d U . S . $ 1 9 6 m i l l i o n b y 1 9 8 6 ; in P e r u t h e r e has b e e n a deficit since 1977 (the c u m u l a t i v e deficit r e a c h e d U.S. $ 1 6 2 m i l l i o n b y 1 9 8 5 ) ; in E c u a d o r t h e r e w a s a s t e a d y d e f i c i t f r o m

1980-1988

(a c u m u l a t i v e d e f i c i t o f U . S . $ 3 5 m i l l i o n b y 1 9 8 7 ) ; in C o s t a R i c a t h e c u m u l a t i v e d e f i c i t f o r 1 9 7 7 - 1 9 8 1 w a s U . S . $ 4 4 m i l l i o n ( a l t h o u g h it b e c a m e a s u r p l u s in t h e s e c o n d h a l f o f t h e 1 9 8 0 s ) ; in U r u g u a y t h e

cumulative

d e f i c i t f o r 1 9 8 2 - 1 9 8 6 w a s U . S . $ 1 7 m i l l i o n ; in B o l i v i a t h e r e w a s a n a n n u a l d e f i c i t f r o m 1 9 8 2 - 1 9 8 6 , e x c e p t f o r o n e y e a r ; a n d in C o l o m b i a t h e c u m u l a t i v e d e f i c i t f o r 1 9 8 1 - 1 9 8 5 w a s U . S . $ 1 3 m i l l i o n . D e f i c i t s in s i c k ness/maternity p r o g r a m s w e r e traditionally covered with loans f r o m the pension p r o g r a m s , but the f o r m e r could neither a m o r t i z e the debts nor pay i n t e r e s t a n d t h u s c o n t r i b u t e d to t h e d e c a p i t a l i z a t i o n of t h e p e n s i o n f u n d s . As pension p r o g r a m s m a t u r e d and their e x p e n d i t u r e s increased, the surp l u s e s s h r a n k a n d d e f i c i t s a p p e a r e d in t h e s e p r o g r a m s as w e l l , t h u s f o r c i n g a h a l t in t r a n s f e r s t o t h e s i c k n e s s / m a t e r n i t y p r o g r a m s , w h i c h in t u r n f o u n d t h e m s e l v e s in t r o u b l e . F o l l o w i n g t h e r e c u p e r a t i o n in t h e s e c o n d h a l f o f t h e 1 9 8 0 s , all b u t f o u r c o u n t r i e s i m p r o v e d t h e f i n a n c i a l s t a t u s of t h e i r s y s t e m s .

However,

f o u r p i o n e e r s still c o n f r o n t e d d e f i c i t s in 1 9 8 6 , a n d b e c a u s e r e s t r u c t u r i n g is e x p a n d i n g in t h e r e g i o n , t h e s i t u a t i o n m i g h t d e t e r i o r a t e a g a i n in s o m e c o u n t r i e s , at l e a s t t e m p o r a r i l y . F u r t h e r m o r e , s y s t e m s t h a t c u r r e n t l y g e n e r ate s u r p l u s e s m a y e v e n t u a l l y be a f f l i c t e d by the s a m e p r o b l e m s s u f f e r e d by the p i o n e e r s u n l e s s they i n t r o d u c e s u b s t a n t i a l r e f o r m s

(Mesa-Lago

1991b, 1992c).

The Social Security Crisis and the Need to Change the System A l t h o u g h t h e y a r e t h e m o s t a d v a n c e d in t h e d e v e l o p i n g w o r l d , L A C ' s s o cial security s y s t e m s , particularly their social i n s u r a n c e s y s t e m s , can do l i t t l e in m o s t o f t h e r e g i o n in t h e i r c u r r e n t f o r m s t o a l l e v i a t e t h e s o c i a l c o s t s i n d u c e d by the r e g i o n a l e c o n o m i c crisis and the p r o c e s s of a d j u s t m e n t / r e s t r u c t u r i n g . O n l y a f e w o f t h e m o s t d e v e l o p e d c o u n t r i e s in L A C h a v e universal c o v e r a g e plus an a d e q u a t e c o m b i n a t i o n of social i n s u r a n c e a n d p u b l i c a s s i s t a n c e to p r o v i d e the m i n i m u m

protection

health care and i n c o m e m a i n t e n a n c e for the poor and other

in t e r m s

of

vulnerable

g r o u p s . B u t e v e n in t h o s e f e w c o u n t r i e s s o c i a l s e c u r i t y is a f f l i c t e d b y financial d i f f i c u l t i e s that h a v e b e e n a g g r a v a t e d by the crisis, t h e r e b y m a k i n g it m o r e d i f f i c u l t t o p r o v i d e c o v e r a g e . In t h e g r e a t m a j o r i t y of L A C , s o c i a l i n s u r a n c e is g e a r e d t o w a r d p r o t e c t i n g the u r b a n f o r m a l s e c t o r of the labor f o r c e a n d p o s s i b l y t h e m o d ern rural sector as well. T h e urban i n f o r m a l and rural traditional sectors,

86

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

w h i c h t o g e t h e r a c c o u n t f o r t h e m a j o r i t y of t h e l a b o r f o r c e in m a n y of t h o s e c o u n t r i e s , are o f t e n l e g a l l y e x c l u d e d f r o m c o v e r a g e . T h e s e l f - e m ployed, peasants, domestic servants, microenterprise employees, seasonal and temporary workers, and the u n e m p l o y e d are therefore either legally u n p r o t e c t e d or p r a c t i c a l l y o u t of the s y s t e m . T h e e c o n o m i c crisis, a d j u s t m e n t , a n d r e s t r u c t u r i n g w o r s e n e d the s i t u a t i o n as p o v e r t y , the i n f o r m a l s e c t o r , a n d u n e m p l o y m e n t g r e w ; c o v e r a g e of the f o r m a l s e c t o r s h r a n k ; the f e w n o n c o n v e n t i o n a l p r o g r a m s p r o t e c t i n g rural p o p u l a t i o n s s t a g n a t e d or s u f f e r e d r e v e r s a l s ; p u b l i c s o c i a l s e r v i c e s w e r e cut; a n d t h e q u a n t i t y a n d q u a l i t y of social s e c u r i t y b e n e f i t s d e c l i n e d . T h e e c o n o m i c r e c o v e r y of the late 1 9 8 0 s a n d e a r l y 1 9 9 0 s h a s s o m e w h a t i m p r o v e d that d i s m a l p i c t u r e , but such i m p r o v e m e n t is not u n i v e r s a l in the r e g i o n . F u r t h e r m o r e , s o c i a l c o s t s s h o u l d w o r s e n as m o r e L A C c o u n t r i e s g o t h r o u g h the p r o c e s s of res t r u c t u r i n g d u r i n g the rest of the 1990s. U n e m p l o y m e n t i n s u r a n c e / a s s i s t a n c e is a v a i l a b l e in o n l y o n e - f i f t h of the L A C c o u n t r i e s , a n d it n o r m a l l y c o v e r s o n l y a m i n o r i t y of the l a b o r f o r c e , i m p o s e s t o u g h e n t i t l e m e n t c o n d i t i o n s , a n d p a y s m e a g e r b e n e f i t s . In t w o c o u n t r i e s w i t h f a i r l y liberal u n e m p l o y m e n t i n s u r a n c e s c h e m e s the inc r e a s e in the n u m b e r of j o b l e s s w o r k e r s in the 1 9 8 0 s led to s i g n i f i c a n t inc r e a s e s in p r o g r a m c o s t s . F u r t h e r m o r e , the n a t u r e of u n e m p l o y m e n t in L A C is d i f f e r e n t than that in the i n d u s t r i a l i z e d w o r l d : it is a c h r o n i c , m a s sive, s t r u c t u r a l , a n d l o n g - t e r m p h e n o m e n o n r a t h e r than a c y c l i c a l or f r i c tional a n d s h o r t - t e r m p r o b l e m . T h e e x p a n s i o n of u n e m p l o y m e n t p r o g r a m s in L A C not o n l y w o u l d be f i n a n c i a l l y u n f e a s i b l e but w o u l d be g e a r e d to the f o r m a l - s e c t o r m i n o r i t y a n d w o u l d d e p l e t e r e s o u r c e s n e e d e d to h e l p the u n c o v e r e d m a j o r i t y of the l a b o r f o r c e and g e n e r a t e m o r e j o b s . T h e f i n a n c i n g m e t h o d s of social s e c u r i t y are part of the p r o b l e m . Payroll c o n t r i b u t i o n s , the m a i n s o u r c e of r e v e n u e , are v e r y h i g h a n d e x h i b i t an i n c r e a s i n g t r e n d . In t w o p i o n e e r c o u n t r i e s the total c o n t r i b u t i o n is a b o u t 5 0 p e r c e n t of the p a y r o l l , but at least their s y s t e m s c o v e r v i r t u a l l y the e n t i r e p o p u l a t i o n . T h e s i t u a t i o n is w o r s e f o r s e v e r a l Latin A m e r i c a n c o u n t r i e s in t h e i n t e r m e d i a t e a n d l a t e c o m e r g r o u p s that e n d u r e r e l a t i v e l y high c o n t r i b u t i o n p e r c e n t a g e s ( e . g . , 21 p e r c e n t ) but h a v e less t h a n o n e f i f t h of their p o p u l a t i o n s c o v e r e d . A b o u t t w o - t h i r d s of t h e c o n t r i b u t i o n s a r e legally s u p p o s e d to be p a i d b y the e m p l o y e r s a n d t h e s t a t e , a n d o n l y o n e - t h i r d by t h e i n s u r e d . In c o u n t r i e s w i t h v e r y low c o v e r a g e it a p p e a r s that m o s t of t h e p o p u l a t i o n , w h o a r e o u t of the s y s t e m , c o n t r i b u t e to fin a n c i n g the c o v e r e d m i n o r i t y via i n c r e a s e d c o n s u m e r p r i c e s (to m a k e u p f o r the e m p l o y e r s ' c o n t r i b u t i o n s ) a n d r e g r e s s i v e t a x e s . N o n c o m p l i a n c e is a serious and growing problem; evasion and payment delays have b e c o m e w o r s e . T h e s t a t e d e b t to t h e s y s t e m is n o t p a i d , a n d its real v a l u e h a s s t e a d i l y s h r u n k . A n o t h e r i m p o r t a n t s o u r c e of r e v e n u e , i n v e s t m e n t ( p a r t i c ularly of p e n s i o n f u n d s ) , h a s b e e n h a r m e d by i n e f f i c i e n t p o l i c i e s and v e r y l o w or n e g a t i v e y i e l d s that h a v e led to a g r a d u a l d e c a p i t a l i z a t i o n of t h e

SOCIAL SECURITY: COPING WITH SOCIAL COSTS

87

f u n d s . T h e e c o n o m i c crisis a n d r e f o r m h a v e h a d n e g a t i v e e f f e c t s on social s e c u r i t y r e v e n u e s in t e r m s of a d e c l i n e in real w a g e s a n d c o n t r i b u t i o n s , an i n c r e a s e in n o n c o m p l i a n c e , a n d a d e t e r i o r a t i o n of i n v e s t m e n t y i e l d s . Esc a l a t i n g i n f l a t i o n has b e e n a m a j o r c u l p r i t b e c a u s e it h a s p r o v i d e d i n c e n t i v e s f o r e m p l o y e r s to r e t a i n t h e i r p a y r o l l c o n t r i b u t i o n s , d e p o s i t t h e m in b a n k s that o f f e r higher interest r a t e s t h a n the f i n e s f o r mora, a n d pay later w i t h d e v a l u e d c u r r e n c y . M o s t i n v e s t m e n t f u n d s are p l a c e d in i n s t r u m e n t s that a r e not i n d e x e d to i n f l a t i o n ; h e n c e , the real v a l u e of the r e s e r v e s has r a p i d l y s h r u n k , and real y i e l d s h a v e b e c o m e i n c r e a s i n g l y n e g a t i v e . S o c i a l security b e n e f i t s in L A C a r e the m o s t a d v a n c e d w i t h i n the dev e l o p i n g w o r l d , and s o m e of t h e p i o n e e r c o u n t r i e s ' b e n e f i t s u s e d to a p p r o x i m a t e t h o s e of i n d u s t r i a l i z e d c o u n t r i e s . In g e n e r a l , t h e m o s t liberal b e n e f i t s and e n t i t l e m e n t c o n d i t i o n s are f o u n d in the p i o n e e r g r o u p , and the strictest are in the l a t e c o m e r g r o u p . V e r y low a g e s of r e t i r e m e n t ( p a r t i c u larly in c o n j u n c t i o n with high life e x p e c t a n c y ) , s e n i o r i t y p e n s i o n s ( b a s e d on y e a r s of service, r e g a r d l e s s of a g e ) , g e n e r o u s s a l a r y - r e p l a c e m e n t rates, a d j u s t m e n t of p e n s i o n s to the c o s t of l i v i n g , a n d liberal m e d i c a l b e n e f i t s h a v e all c o n t r i b u t e d to s k y r o c k e t i n g e x p e n d i t u r e s that are not m a t c h e d by c o m p a r a b l e r e v e n u e i n c r e a s e s . T h e b a d e x a m p l e of t h e p i o n e e r s w a s f o l l o w e d by s o m e c o u n t r i e s in the i n t e r m e d i a t e and l a t e c o m e r g r o u p s , w h e r e s u c h an a p p r o a c h c o n t r a s t e d w i t h the lack of c o v e r a g e f o r the m a j o r i t y of their p o p u l a t i o n s . T h e e c o n o m i c c r i s i s and r e f o r m h a v e h a d a n e g a t i v e impact on the real value a n d q u a l i t y of b e n e f i t s : i n f l a t i o n led to a d j u s t m e n t s in p e r s o n n e l s a l a r i e s a n d p e n s i o n s to m a t c h i n c r e a s e s in t h e c o s t of living, a n d it a l s o i n c r e a s e d the c o s t s of i m p o r t e d d r u g s a n d m e d i c a l e q u i p m e n t . But the f i n a n c i a l crisis f a c e d by social s e c u r i t y p r o g r a m s e v e n t u a l l y f o r c e d cuts in real b e n e f i t s a n d the q u a l i t y of health c a r e . T h e r e f o r e , e v e n t h o s e p r o t e c t e d have s u f f e r e d f r o m a d e t e r i o r a t i o n of b e n e f i t s . H e a l t h - c a r e costs r a p i d l y i n c r e a s e d , partly b e c a u s e of e x t e r n a l f a c t o r s (i.e., i n f l a t i o n , d e m o g r a p h i c s — s u c h as a g i n g p o p u l a t i o n s ) b u t a l s o b e c a u s e of internal f a c t o r s : the o v e r w h e l m i n g p r e d o m i n a n c e of costly c u r a tive m e d i c i n e o v e r p r e v e n t i v e m e d i c i n e and P H C ; the lack of i n t e g r a t i o n and coordination a m o n g major providers (particularly social insurance s y s t e m s a n d m i n i s t r i e s of h e a l t h ) ; t h e e x p a n s i o n of s o c i a l i n s u r a n c e c o v e r a g e (in s o m e c o u n t r i e s ) to l o w e r - i n c o m e g r o u p s w i t h a h i g h e r i n c i d e n c e of d i s e a s e a n d t e n d e n c y to u s e t h e s e r v i c e s m o r e o f t e n ; the i n c r e a s i n g c o s t s of m e d i c a l p e r s o n n e l a n d s u p p l i e s ; the g e n e r o s i t y of b e n e f i t s and ent i t l e m e n t c o n d i t i o n s ; and i n e f f i c i e n c i e s in h o s p i t a l a d m i n i s t r a t i o n . A d m i n i s t r a t i v e e x p e n d i t u r e s f o r s o c i a l s e c u r i t y in L A C a r e p r o b a b l y t h e h i g h e s t in the w o r l d a n d s h o w a r i s i n g t r e n d : t h e a v e r a g e a d m i n i s t r a t i v e s h a r e of total social s e c u r i t y e x p e n d i t u r e s i n c r e a s e d f r o m 8 p e r c e n t t o 18 p e r c e n t f r o m 1 9 6 5 - 1 9 8 6 , in c o n t r a s t to a v e r a g e s of 2 - 4 p e r c e n t in i n d u s t r i a l i z e d c o u n t r i e s . T h e m a j o r r e a s o n f o r t h i s p h e n o m e n o n is t h e l a r g e n u m b e r of p e r s o n n e l w h o a r e p a i d r e l a t i v e l y h i g h s a l a r i e s a n d a r e

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e n t i t l e d to g e n e r o u s f r i n g e b e n e f i t s that are s u p e r i o r to t h o s e r e c e i v e d b y the a v e r a g e insured. Other c a u s e s o f high administrative c o s t s

include

m u l t i p l e i n s t i t u t i o n s , g e o g r a p h i c o b s t a c l e s to r e a c h i n g p a r t s o f the p o p u l a t i o n , l e g a l c o m p l e x i t y , f l a w s in r e g i s t r a t i o n , l a c k o f c o o r d i n a t i o n a m o n g departments, a c c o u n t i n g d e f i c i e n c i e s , and c o m p l e x and protracted

pro-

c e s s i n g o f b e n e f i t s . T h e e c o n o m i c crisis and r e f o r m , c o m b i n e d with the fin a n c i a l d i f f i c u l t i e s s u f f e r e d by s o c i a l s e c u r i t y , are f o r c i n g a t r i m m i n g o f t h e b u r e a u c r a c y as w e l l a s an i m p r o v e m e n t in a d m i n i s t r a t i v e e f f i c i e n c y . T h e c o s t o f s o c i a l s e c u r i t y in L A C is q u i t e h i g h : it a v e r a g e d 4 p e r c e n t o f G D P in 1 9 8 6 ( t h e l a t e s t y e a r f o r w h i c h d a t a a r e a v a i l a b l e ) b u t r a n g e d f r o m 1 0 - 1 5 p e r c e n t in t h r e e p i o n e e r c o u n t r i e s ( s i m i l a r to t h e p e r c e n t a g e s o f J a p a n , t h e U n i t e d S t a t e s , a n d t h e f o r m e r U S S R ) . In 1 9 8 3 - 1 9 8 4 , at t h e w o r s t point o f the e c o n o m i c c r i s i s , 31 p e r c e n t o f the 2 7 L A C

countries

c o n s i d e r e d s u f f e r e d f i n a n c i a l d e f i c i t s in s o c i a l s e c u r i t y ; t h e s i t u a t i o n h a d improved by

1985-1986,

but 2 0

percent

o f the s y s t e m s

still

showed

d e f i c i t s . T h i s a s s e s s m e n t is b a s e d o n r o u g h m a c r o e c o n o m i c e s t i m a t e s , b u t m o r e d e t a i l e d a n d a c c u r a t e s t u d i e s c o n d u c t e d in s e v e r a l L a t i n

American

countries from 1 9 8 6 - 1 9 9 2 clearly s h o w a rapid financial deterioration

of

their s y s t e m s , particularly a m o n g the p i o n e e r s but a l s o a m o n g s o m e c o u n t r i e s in t h e o t h e r t w o g r o u p s . A c t u a r i a l d e f i c i t s a r e p r o b a b l y u n i v e r s a l a n d w o r s e n i n g . T h e p i o n e e r s (with the e x c e p t i o n o f C h i l e ) h a v e shifted f r o m p a r t i a l c a p i t a l i z a t i o n m e t h o d s to p a y - a s - y o u - g o a p p r o a c h e s a n d are h e a v ily s u b s i d i z e d b y t h e s t a t e . S y s t e m s that c u r r e n t l y g e n e r a t e f i n a n c i a l s u r p l u s e s m a y e v e n t u a l l y b e a f f l i c t e d b y the s a m e p r o b l e m s s u f f e r e d b y t h e pioneers unless they introduce substantial c h a n g e s . T h e p r e s s u r e t o r e f o r m s o c i a l s e c u r i t y in L A C r e a c h e d h e i g h t s at t h e b e g i n n i n g o f t h e

unparalleled

1 9 9 0 s . T h e n e x t c h a p t e r is d e v o t e d

to

s t u d y i n g t h e c o u n t r i e s that h a v e a l r e a d y i n t r o d u c e d o r are in the p r o c e s s o f i m p l e m e n t i n g r e f o r m s , a n d to d i s c u s s i n g t h e n a t u r e o f s u c h c h a n g e s a n d their e f f e c t s on the a l l e v i a t i o n o f s o c i a l c o s t s .

3 Changing Social Security: Case Studies of Reform, Privatization, and Universalization

Trends and Types of Reform In t h e p i o n e e r c o u n t r i e s partial s o c i a l s e c u r i t y r e f o r m s that w e r e i n t r o d u c e d in t h e 1 9 6 0 s a n d 1 9 7 0 s d i d n o t t a c k l e t h e f u n d a m e n t a l p r o b l e m s f a c e d by their s y s t e m s , and a t t e m p t s to i n t r o d u c e p r o f o u n d r e f o r m s f a i l e d in the 1 9 8 0 s . A n e x c e p t i o n w a s C h i l e , w h i c h l a u n c h e d a r a d i c a l r e f o r m ( p r i v a t i z a t i o n ) at the b e g i n n i n g of the 1 9 8 0 s . T h e C h i l e a n m o d e l did not h a v e a s i g n i f i c a n t i n f l u e n c e in L a t i n A m e r i c a until t h e 1 9 9 0 s b e c a u s e it w a s a s s o c i a t e d w i t h the military g o v e r n m e n t of P i n o c h e t . W h e n the n e w , d e m o c r a t i c C h i l e a n g o v e r n m e n t e n d o r s e d the p r e v i o u s s o c i a l s e c u r i t y ref o r m , h o w e v e r , the r e f o r m b e c a m e p o l i t i c a l l y a c c e p t a b l e in t h e r e g i o n . A d j u s t m e n t a n d r e s t r u c t u r i n g e c o n o m i c p o l i c i e s a d v o c a t e d by i n t e r n a t i o n a l l e n d i n g a g e n c i e s p u s h e d f o r t h e C h i l e a n m o d e l of p r i v a t i z a t i o n . A n d g o v e r n m e n t s , c r u s h e d by the h e a v y cost of d e b t s e r v i c e a n d e x t e r n a l p r e s s u r e , b e c a m e o p e n to social s e c u r i t y r e f o r m . In t h e 1 9 9 0 s , t h e r e f o r e , a s e r i e s of r e f o r m s b e g a n to u n f o l d in t h e r e g i o n , m o s t of t h e m c o n s i d e r i n g s o m e d e g r e e of p r i v a t i z a t i o n . T o w a r d the e n d of the 1980s a b o u t 9 0 p e r c e n t of t h e b e n e f i t e x p e n d i t u r e s f o r s o c i a l i n s u r a n c e a n d f a m i l y a l l o w a n c e s in 2 4 Latin A m e r i c a n a n d C a r i b b e a n c o u n t r i e s w e n t to p e n s i o n s ( 5 4 p e r c e n t ) a n d s i c k n e s s / m a t e r n i t y ( 3 6 p e r c e n t ) , o b v i o u s l y the t w o m o s t i m p o r t a n t social s e c u r i t y s c h e m e s in the r e g i o n . A s the p e n s i o n s c h e m e s m a t u r e d in the p i o n e e r c o u n t r i e s , they r e q u i r e d h i g h e r p r o p o r t i o n s of total b e n e f i t e x p e n d i t u r e s , e.g., an a v e r a g e of 7 6 p e r c e n t , c o m p a r e d w i t h an a v e r a g e of 2 8 p e r c e n t a m o n g l a t e c o m e r c o u n t r i e s s u c h as t h e D o m i n i c a n R e p u b l i c , V e n e z u e l a , a n d t h o s e of C e n tral A m e r i c a . A l t h o u g h the p r o b l e m s c o n c e r n i n g h e a l t h c a r e s h o u l d not be u n d e r e s t i m a t e d , t h e s o c i a l s e c u r i t y c r i s i s is l a r g e l y an o u t c o m e of d i s e q u i l i b r i u m in the p e n s i o n s c h e m e s , a p r o b l e m that in the f u t u r e will a f f e c t m o r e and m o r e countries. Even w o r s e , the s i c k n e s s / m a t e r n i t y s c h e m e s have usually received transfers f r o m the pension s c h e m e s , so financial

89

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problems in the latter will close a major source of f u n d i n g to the former, and both types of programs may go bankrupt. Because of these problems it is not surprising that most social security reforms in Latin America (and the most radical reforms) focus on the pension schemes. This chapter offers a general view of all types of ongoing reforms in the region, in terms of both pensions and health care. Case studies of reform are discussed in the following sections.

Pensions Four general types of pension reform are evolving in Latin America: (1) reformed public schemes, wherein the current public scheme continues but is substantially m o d i f i e d ; (2) substitutive private schemes, wherein the public scheme is closed and supplanted by a fully funded private scheme; (3) mixed schemes that involve a c o m b i n a t i o n of a r e f o r m e d public scheme and a fully f u n d e d scheme that could be either public, private, or a combination of both; and (4) supplementary pension schemes that assume many f o r m s and c o m p l e m e n t , but do not replace, r e f o r m e d public s c h e m e s of the first and third types. In all cases there might be a public assistance, noncontributory pension for the elderly dispossessed w h o are not covered by social security. Reformed public schemes. The best example of a reformed public scheme is found in Costa Rica, which in the 1980s and early 1990s introduced reforms in its general social security institute (CCSS) to stabilize its pension scheme, including (1) increases in the ages of early retirement; (2) an increase in the overall payroll contribution and the introduction of scaled years of contribution to discourage early retirement (so that the lower the age, the more years of contribution required, and vice versa); (3) control measures to reduce evasion and payment delays, as well as agreements with the state to pay past debts; and (4) adjustment and other efficient policies to cut administrative expenditures. In addition, a 1992 law "closed" several independent pension schemes for civil servants, who enjoyed unjustified privileges, and incorporated these schemes into the CCSS. Mexico and Brazil have so far maintained public pension s c h e m e s without major structural reforms. In Mexico the general social security institute (IMSS) increased the payroll contributions, and a new compulsory s u p p l e m e n t a r y pension s c h e m e was introduced in 1992. In Brazil a constitutional r e f o r m , s c h e d u l e d to take place in 1993, is expected to eliminate or at least restrict the seniority pension and perhaps incorporate privileged independent pensions into the general public scheme; a supplementary pension scheme is also a possibility. T h e cases of Costa Rica and Mexico are analyzed later in this chapter, as is J a m a i c a ' s unreformed public scheme.

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91

Substitutive private schemes. Chile is the pioneer and model of privatization, not only in Latin America but probably in the world. In substitutive private schemes the old public scheme (often based on a pay-as-you-go approach and suffering a deficit) is "closed" (i.e., new affiliations are not allowed) and is replaced by a new mandatory, private, fully f u n d e d s c h e m e administered by private corporations (Administradoras de Fondos de Pensiones, AFPs). Those insured in the public scheme are given the option to stay in or m o v e to an A F P within a given period of time. Conditions in the public s c h e m e are standardized and tightened, and the scheme itself disappears when all its potential beneficiaries have died. Only those insured contribute to the new system (in both the public and private schemes); the e m p l o y e r s ' contributions are eliminated, and the state finances all ensuing deficit related to the r e f o r m . A f t e r i m p l e m e n t i n g a m o d i f i e d C h i l e a n - s t y l e r e f o r m in 1991, Peru enacted a law in 1992 that f o l l o w s the C h i l e a n m o d e l . T h e r e have been no other r e f o r m s of this type i m p l e m e n t e d in Latin A m e r i c a , but in C o l o m b i a a legal d r a f t submitted to the c o n g r e s s in 1 9 9 2 f o l l o w e d this a p p r o a c h ; the d r a f t , h o w e v e r , w a s w i t h d r a w n a n d is c u r r e n t l y u n d e r d i s c u s s i o n . T h e c a s e s of Chile, Peru, and C o l o m b i a will a l s o be a n a l y z e d later in this chapter. Mixed schemes. Legal drafts submitted in 1992 to the congressional bodies of Argentina and Uruguay are e x a m p l e s of the m i x e d - s c h e m e approach. In both cases the public scheme continues but is reformed; in Argentina the tightening of entitlement conditions and benefits is more drastic than in Uruguay. In both countries the public s c h e m e provides a basic pension. In Argentina the supplementary s c h e m e basically follows the Chilean model; but in Uruguay it is voluntary, can be administered by public and private nonprofit institutions, and has varying benefits and types of financing. (In Peru and Colombia there were, respectively, a decree-law and projects in an effort to follow the mixed approach b e f o r e their g o v e r n m e n t s decided to shift to the substitutive private scheme.) T h e cases of Argentina and Uruguay are also studied later in this chapter. A t h e o r e t i c a l variant of the m i x e d a p p r o a c h has b e e n p r o p o s e d by I L O o f f i c i a l s but has not yet been c o n s i d e r e d by any c o u n t r y : the p u b l i c s c h e m e g u a r a n t e e s a m i n i m u m p e n s i o n ; a c o l l e c t i v e , partially f u n d e d s c h e m e (instead of individual, f u l l y f u n d e d o n e s ) retains e m p l o y e r s ' cont r i b u t i o n s and p a y s an e a r n i n g s - r e l a t e d p e n s i o n ; an o p t i o n a l s u p p l e m e n tary s c h e m e (of a n o n s p e c i f i e d n a t u r e ) p a y s a n o t h e r s u p p l e m e n t ; and a p u b l i c a s s i s t a n c e pension is a v a i l a b l e f o r the n o n i n s u r e d w h o lack res o u r c e s (Gillion and Bonilla 1992). R e f o r m s are currently b e i n g s t u d i e d in Bolivia, E c u a d o r , G u a t e m a l a , and V e n e z u e l a , but it is still t o o e a r l y to p r e d i c t w h a t m o d e l s they will a p p l y (Abril O j e d a 1991; U t h o f f a n d S z a l a c h m a n 1 9 9 1 ; C I E N 1 9 9 2 ; M e s a - L a g o 1992b).

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Supplementary pension schemes. Supplementary pension s c h e m e s ( S P S s ) have been under discussion and in operation in Europe for the last 25 years, but they are incipient in Latin A m e r i c a and were not analyzed at a regional meeting until 1989. T h e supplementary pension c o m p l e m e n t s the pension of the general public s c h e m e , usually because the latter is basic or minimal and uniform; hence, its level is very low and does not provide adequate protection. T h e purpose of the supplement is therefore to raise the c o m b i n e d pension to maintain the standard of living that the pensioner had prior to retirement. But in Latin America most of the few existing SPSs do not match that purpose; instead they c o m p l e m e n t g e n e r a l - s c h e m e pensions that are not basic and uniform but rather related to both the insured's previous incomes and their periods of affiliation and contribution. However, as pensions of the general s c h e m e in many L A C countries were eroded by inflation during the crisis they o f f e r e d a more basic or m i n i m u m level, a situation that has raised the d e m a n d for SPSs. T h e s e S P S s can a s s u m e a variety of forms: m a n d a t o r y or voluntary; established by law, collective agreements, or enterprises; managed by social security institutions, private corporations (nonprofit or forprofit), or both; and financed by the insured, the employer, or both (CastroGutiérrez 1990). At least f o u r Latin A m e r i c a n c o u n t r i e s h a v e S P S s : E c u a d o r , G u a t e mala, M e x i c o , and U r u g u a y . In a d d i t i o n , there are projects under c o n s i d eration in A r g e n t i n a , C o l o m b i a , and other c o u n t r i e s . In E c u a d o r S P S s are of v o l u n t a r y a f f i l i a t i o n , r e g u l a t e d by law, e x c l u s i v e l y a d m i n i s t e r e d by the general social security institute ( I E S S ) t h r o u g h contracts with i n d i v i d u a l s or g r o u p s of insured, and f i n a n c e d by both e m p l o y e r ' s and i n s u r e d ' s c o n t r i b u t i o n s . In 1990 t h e r e w e r e o n l y t h r e e S P S s in E c u a d o r ( f o r p u b l i c t e a c h e r s and c o m m u n i c a t i o n and p r i n t i n g w o r k e r s ) that o f f e r e d early ret i r e m e n t and an a d d i t i o n a l p e n s i o n o v e r the g e n e r a l o n e . In G u a t e m a l a S P S s are v o l u n t a r y ; r e g u l a t e d by law; a d m i n i s t e r e d by private, n o n p r o f i t a s s o c i a t i o n s or e n t e r p r i s e s ( a u t h o r i z e d and s u p e r v i s e d by the g e n e r a l ins t i t u t e — I G S S ) ; a n d f i n a n c e d by b o t h e m p l o y e r s and i n s u r e d . In 1 9 9 0 there w e r e eight S P S s (for e m p l o y e e s in several banks, for a u t o n o m o u s ins t i t u t i o n s , o n e f o r e a c h m u n i c i p a l i t y a n d e a c h u n i v e r s i t y , and f o r a port e n t e r p r i s e ) that o f f e r e d o l d - a g e p e n s i o n s ( w i t h earlier r e t i r e m e n t and an a d d i t i o n a l p e n s i o n ) a n d d i s a b i l i t y / s u r v i v o r s p e n s i o n s . In M e x i c o t h e r e w e r e 1,160 S P S s in 1 9 9 0 that c o v e r e d a l m o s t o n e million w o r k e r s ; S P S s are regulated by law but a s s u m e a w i d e variety of f o r m s ( C a s t r o - G u t i é r r e z 1990). In 1992 a law e s t a b l i s h e d m a n d a t o r y S P S s for all w o r k e r s c o v e r e d by the m a j o r social security institute of the private sector ( I M S S ) ; f e d e r a l civil s e r v a n t s are e x p e c t e d to be entitled to S P S s soon. E m p l o y e r s m a n d a torily c o n t r i b u t e 2 p e r c e n t of the p a y r o l l ( t h e insured can add v o l u n t a r y c o n t r i b u t i o n s ) ; this a m o u n t is c o l l e c t e d t h r o u g h the b a n k i n g s y s t e m res p o n s i b l e for o p e n i n g and m a i n t a i n i n g individual accounts for the insured. All f u n d s , h o w e v e r , m u s t be d e p o s i t e d in the Bank of M e x i c o (in the

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a c c o u n t of t h e I M S S ) , w h i c h i n v e s t s t h e m in t r e a s u r y b i l l s . T h e s u m s in the individual a c c o u n t s are a d j u s t e d to the price index a n d e x e m p t e d f r o m taxes, and they m u s t earn a real interest rate no l o w e r than 2 percent y e a r l y . T h e i n s u r e d w i l l h a v e a c c e s s to t h e a c c u m u l a t e d f u n d s u p o n r e a c h i n g 6 5 y e a r s of a g e o r b e c o m i n g e n t i t l e d t o a n I M S S p e n s i o n ; t h e f u n d m a y t h e n b e p a i d in a l u m p s u m o r u s e d t o b u y a l i f e a n n u i t y f r o m a n ins u r a n c e c o m p a n y . T h e l a w a l s o a l l o w s a n i n d i v i d u a l f u n d to b e t r a n s f e r r e d to a p r i v a t e i n v e s t m e n t c o r p o r a t i o n to i n c r e a s e its y i e l d ( S o t o P é r e z 1 9 9 2 ) . In a d d i t i o n to t h e S P S s r e g u l a t e d b y l a w , t h e r e a r e m a n y m o r e in L a t i n A m e r i c a e s t a b l i s h e d by c o l l e c t i v e a g r e e m e n t s or by e n t e r p r i s e

plans.

( S P S s in U r u g u a y a r e d i s c u s s e d l a t e r in t h i s c h a p t e r . )

Health

Care

H e a l t h c a r e in L a t i n A m e r i c a is p r o v i d e d by t h r e e s e c t o r s . T h e p u b l i c s e c tor is o v e r s e e n by t h e c o u n t r y ' s m i n i s t r y of p u b l i c h e a l t h , w h i c h n o r m a l l y c o v e r s t h e l o w e s t i n c o m e g r o u p s of t h e p o p u l a t i o n . T h e s o c i a l i n s u r a n c e sector (the s i c k n e s s / m a t e r n i t y

s c h e m e ) usually covers

middle-income

g r o u p s . T h e s e t w o s e c t o r s c o m b i n e d c o v e r t h e g r e a t m a j o r i t y of t h e p o p u l a t i o n a n d c o n t i n u e to b e t h e l a r g e s t in t h e r e g i o n . T h e p r i v a t e s e c t o r is t h e s m a l l e s t ; it u s u a l l y c o v e r s h i g h - a n d u p p e r m i d d l e - i n c o m e g r o u p s b u t is r a p i d l y e x p a n d i n g in m a n y c o u n t r i e s . It c o m p r i s e s n o n p r o f i t i n s t i t u t i o n s (or N G O s , s u c h a s r e l i g i o u s a n d c h a r i t a b l e o r g a n i z a t i o n s , d e v e l o p m e n t institutes, and c o m m u n i t y o r g a n i z a t i o n s ) a n d for-profit p r o v i d e r s (such as p r e p a i d p l a n s ; p r i v a t e h o s p i t a l s , c l i n i c s , a n d m e d i c a l p e r s o n n e l ; a n d traditional medical practitioners) ( M e s a - L a g o 1992c). S o f a r t h e r e a r e n o e x a m p l e s in t h e r e g i o n of f u l l p r i v a t i z a t i o n of h e a l t h - c a r e s e r v i c e s . T h r e e t y p e s of h e a l t h - c a r e r e f o r m s a r e t a k i n g p l a c e : (1) continuations of the public social insurance system but with marginal privatization or collaboration with the private sector; (2) partial substitutive private s c h e m e s ; and (3) s u p p l e m e n t a r y private s c h e m e s . Public-private

collaboration

and marginal

privatization.

In C o s t a R i c a t h e

public and social insurance ( C C S S ) sectors have integrated their health-care f a c i l i t i e s a n d s e r v i c e s s i n c e t h e 1 9 7 0 s : all h o s p i t a l s a r e o p e r a t e d by t h e C C S S , a n d t h e m i n i s t r y of p u b l i c h e a l t h o f f e r s p r e v e n t i v e m e d i c i n e a n d prim a r y h e a l t h c a r e f o r m a r g i n a l u r b a n a n d rural g r o u p s . T h e C C S S h a s r e d u c e d h e a l t h - c a r e c o s t s , i n c r e a s e d its e f f i c i e n c y , a n d i m p r o v e d t h e q u a l i t y of its services through five collaborative p r o g r a m s with the private sector. S o far, h o w e v e r , the j o i n t p r i v a t e - s e c t o r p r o g r a m s a r e a v a i l a b l e to n o m o r e than o n e f i f t h of t h e i n s u r e d in t h e C C S S . U n d e r t h e i n f l u e n c e of C o s t a R i c a , in t h e l a t e 1 9 8 0 s

Colombia's

m a j o r social security institute ( I S S ) s i g n e d a g r e e m e n t s with c o o p e r a t i v e s b u t w i t h o u t t h e s a m e p o s i t i v e r e s u l t s . A l a w e n a c t e d in 1 9 9 1 e m p o w e r e d

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the ministry of public health and the ISS to sign contracts with private ins t i t u t i o n s a n d p r o v i d e d i n c e n t i v e s to p r o m o t e integration of p u b l i c and private health s e r v i c e s . A full r e f o r m of social security ( c o m b i n i n g pensions and health care) w a s p a s s e d in 1993. In J a m a i c a the public sector (i.e., the ministry of health) legally covers the entire p o p u l a t i o n b e c a u s e social i n s u r a n c e lacks a s i c k n e s s / m a t e r n i t y s c h e m e . Since the late 1980s there has been an increasing use of private facilities to r e d u c e costs and i m p r o v e the quality of the m i n i s t r y ' s n o n m e d ical services. In addition, more than o n e - f o u r t h of the doctors in the public sector are now private practitioners. T h e ministry signs contracts with priv a t e p r o v i d e r s and o v e r s e e s their s e r v i c e s . Privatization of h o s p i t a l s and selected preventive and curative services w a s scheduled to start in 1989 but was halted by the c h a n g e in g o v e r n m e n t that year. The cases of Costa Rica, J a m a i c a , and C o l o m b i a will be a n a l y z e d later in this chapter. Partial substitutive private schemes. In 1981 Chile reformed its health-care system allowing the insured to select between the public social insurance scheme ( F O N A S A ) or private H M O s ( k n o w n in Chile as I S A P R E s ) of their choice. The payroll contribution of 7 percent is paid to either F O N A S A or the I S A P R E ; those insured by an I S A P R E have to add a copayment to finance the package of benefits o f f e r e d , which must be better than that in the public sector but does not o f f e r preventive, maternity, and emergency services (hence, it is indirectly subsidized by the public scheme). In 1991, 72 percent of the population was covered by F O N A S A , 19 percent by I S A P R E s , 5 percent by the armed forces, and 4 percent was not covered; it is projected that in 1996, 29 percent will be c o v e r e d by ISAPREs. As coverage by the I S A P R E s has grown, the lower-income groups have been left in the public scheme and are increasingly deprived of the contributions of higher-income groups; hence, public services have deteriorated, and emergency services faced a crisis at the end of 1992. T h o s e insured in I S A P R E s can either pay to the provider and get an agreed-upon percentage reimbursed by the ISAPRE; buy vouchers f r o m the I S A P R E to pay the provider, w h o gets reimbursed by the I S A P R E ; or receive direct services from an I S A P R E that has the necessary facilities. T h e n u m b e r of I S A P R E s rapidly increased to 34 by the end of 1991 (more than twice the number of AFPs); the six largest I S A P R E s cover close to three-fourths of the beneficiaries. T h e r e seems to be more competition a m o n g I S A P R E s than a m o n g AFPs; the costs of administration and sales in I S A P R E s declined f r o m 40.5 percent to 18.9 percent of total expenditures f r o m 1 9 8 1 - 1 9 9 1 but are still quite high. A superintendency of I S A P R E s supervises the private sector. In spite of its rapid expansion, the private health sector in Chile covers only about one-fifth of the population (Iglesias and Acuna 1991; C I E D E S S 1992; Gillion and Bonilla 1992). A law e n a c t e d in Peru in N o v e m b e r 1991 that f o l l o w e d the C h i l e a n m o d e l i n t r o d u c e d a p r i v a t e health s y s t e m ; the i n s u r e d can stay in the

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social security institute ( I P S S ) or t r a n s f e r to the H M O s ( k n o w n in P e r u as O S S s ) , w h i c h o f f e r d i f f e r e n t health p a c k a g e s . H o w e v e r , the P e r u v i a n s y s tem a d d s an e l e m e n t of solidarity lacking in the C h i l e a n o n e : the entire e m p l o y e r ' s c o n t r i b u t i o n and part of the i n s u r e d ' s c o n t r i b u t i o n is kept at the I P S S . T h e rest of the i n s u r e d ' s c o m p u l s o r y c o n t r i b u t i o n (as well as any a d ditional v o l u n t a r y c o n t r i b u t i o n ) is t r a n s f e r r e d to the O S S of t h e i n d i v i d u a l ' s c h o i c e , w h i c h f r e e l y c h a r g e s a d d i t i o n a l f e e s to t h e i n d i v i d u a l f o r its s e r v i c e s too. T h e I P S S c a n s u b c o n t r a c t w i t h an O S S f o r t h e p r o v i s i o n of e m e r g e n c y and h i g h - t e c h m e d i c a l s e r v i c e s . A s u p e r i n t e n d e n c y of O S S s r e g u l a t e s a n d s u p e r v i s e s the p r i v a t e s y s t e m . H o w e v e r , by the e n d of 1992 the n e w s y s t e m had not yet b e e n r e g u l a t e d , so it w a s not o p e r a t i v e ( " C r e a n el S i s t e m a . . ." 1991; L ó p e z G o n z á l e z and C é s p e d e s G a r a y 1 9 9 2 ) . Supplementary private schemes. In a small but increasing n u m b e r of Latin A m e r i c a n countries H M O s are e x p a n d i n g their c o v e r a g e a m o n g the noninsured. In the D o m i n i c a n R e p u b l i c , w h e r e social security c o v e r s only about 4 percent of the population and health services are i n a d e q u a t e , H M O s ( k n o w n as igualas) are not only i n c o r p o r a t i n g the n o n i n s u r e d but also o f f e r ing better s u p p l e m e n t a r y s e r v i c e s for the f e w insured. For a m o n t h l y p r e m i um igualas provide c o m p r e h e n s i v e health care to about 7 percent of the population, s o m e of w h o m are c o v e r e d by social security but d o not use its services. E m p l o y e r s of large and midsize e n t e r p r i s e s f i n a n c e 75 percent of the total p r e m i u m , but 145,000 m i c r o e n t e r p r i s e s that e m p l o y a total of 4 0 0 , 0 0 0 w o r k e r s c a n n o t a f f o r d that level of p a y m e n t . Recently there h a v e been negotiations b e t w e e n associations of these m i c r o e n t e r p r i s e s ( w h i c h are willing to enroll m e m b e r s and collect f e e s ) and the igualas, w h i c h are s t u d y i n g a lowcost p a c k a g e — b a s e d on a large g r o u p of i n s u r e d — t o p r o v i d e p r i m a r y health care and related services to potential m e m b e r s ( M e s a - L a g o 1992c).

Costa Rica: A Reformed Public Scheme with Universal Coverage The Achievement

of

Universalization

T h e C o s t a R i c a n social i n s u r a n c e f u n d ( C C S S ) w a s e s t a b l i s h e d in 1 9 4 1 a n d b e g a n to o p e r a t e s i c k n e s s / m a t e r n i t y a n d p e n s i o n p r o g r a m s in 1943. Its c o v e r a g e w a s initially limited to u r b a n s a l a r i e d w o r k e r s , w h o w e r e m a i n l y in t h e c a p i t a l city and p r o v i n c i a l c a p i t a l s : in 1 9 6 0 o n l y 1 5 . 4 p e r c e n t of the total p o p u l a t i o n (25 p e r c e n t of t h e E A P ) w a s i n s u r e d . In 1 9 6 1 a n d 1971 t w o l a w s o r d e r e d the C C S S to a c h i e v e u n i v e r s a l i z a t i o n in o n e d e c a d e ; in t h e 1970s m a n d a t o r y c o v e r a g e w a s t h u s g r a n t e d to d o m e s t i c s e r v a n t s a n d e m p l o y e e s of m i c r o e n t e r p r i s e s ( e v e n t h o s e w i t h o n e e m p l o y e e ) , a n d v o l untary c o v e r a g e b e c a m e a v a i l a b l e f o r the s e l f - e m p l o y e d , s e a s o n a l w o r k e r s ,

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unpaid family w o r k e r s , and e m p l o y e r s . Social assistance (i.e., nonc o n t r i b u t o r y ) c o v e r a g e b e c a m e m a n d a t o r y f o r h e a l t h care ( e x c e p t f o r cash b e n e f i t s ) a n d p e n s i o n s to i n d i g e n t s , i.e., the d i s p o s s e s s e d or t h o s e w h o h a v e e a r n i n g s l o w e r t h a n 7 5 p e r c e n t of t h e m i n i m u m a g r i c u l t u r a l w a g e ; t h e s e p e n s i o n s w e r e c o n d i t i o n e d to a m e a n s test. P e n s i o n e r s u n d e r e i t h e r c o n t r i b u t o r y or n o n c o n t r i b u t o r y p r o g r a m s w e r e e n t i t l e d to health c a r e , as w e r e the d e p e n d e n t f a m i l i e s of all the g r o u p s p r o t e c t e d by the C C S S . In 1 9 7 3 all h o s p i t a l s of the m i n i s t r y of h e a l t h ( M H ) w e r e t r a n s f e r r e d to t h e C C S S ; t h e m i n i s t r y ' s f u n c t i o n s w e r e l i m i t e d to p r e v e n t i v e m e d i c i n e , and the C C S S f o c u s e d on c u r a t i v e m e d i c i n e (in the f u t u r e t h e C C S S w o u l d b e c o m e i n v o l v e d w i t h p r e v e n t i o n as w e l l ) . T h e M H w a s a l s o e n t r u s t e d with the task of e x p a n d i n g p r i m a r y health c a r e ( P H C ) to t h e m o s t r e m o t e , d i s p e r s e d r u r a l p o p u l a t i o n as w e l l as to u r b a n m a r g i n a l g r o u p s . T h e M H ' s rural h e a l t h p r o g r a m b e g a n in 1973, a n d its u r b a n c o m m u n i t y p r o g r a m s t a r t e d in 1976; b o t h t a r g e t e d the p o o r a n d the l o w - i n c o m e p o p ulation. T h e social d e v e l o p m e n t and f a m i l y - a l l o w a n c e s program w a s est a b l i s h e d in 1974, f u n d e d as part of the M H ' s p r o g r a m s f o r health c a r e f o r the p o o r a n d p r e v e n t i o n . In 1 9 7 9 a n a t i o n a l health s y s t e m w a s l e g a l l y f o r m a l i z e d , w i t h a c l e a r e r d i v i s i o n of f u n c t i o n s b e t w e e n the C C S S a n d t h e M H ; s i n c e t h e 1 9 8 0 s a p r o c e s s of i n t e g r a t i n g t h e s e t w o i n s t i t u t i o n s has been taking place (Jaramillo Antillon and Miranda 1985; M e s a - L a g o 1 9 8 9 c ; Q u i r o s C o r o n a d o 1991). T o t a l p o p u l a t i o n c o v e r a g e f o r h e a l t h c a r e i n c r e a s e d to 3 8 . 4 p e r c e n t in 1970 and p e a k e d at 8 4 . 4 p e r c e n t in 1979. B e c a u s e of the e c o n o m i c crisis the c o v e r a g e d e c l i n e d to 7 7 p e r c e n t in 1981; h o w e v e r , a l t h o u g h the n u m b e r of i n s u r e d in the c o n t r i b u t o r y p r o g r a m d e c r e a s e d , that of c o v e r e d ind i g e n t s i n c r e a s e d . S i n c e 1 9 8 4 the p e r c e n t a g e of c o v e r a g e h a s b e e n r i s i n g a g a i n , a n d by 1 9 8 9 it r e a c h e d t h e h i s t o r i c a l r e c o r d of 8 5 . 4 p e r c e n t . T h e r e m a i n i n g 14.6 p e r c e n t of t h e p o p u l a t i o n — w h i c h is not c o v e r e d b y the C C S S — i s said to h a v e e n o u g h r e s o u r c e s to b u y its o w n p r o t e c t i o n ; t h e r e f o r e v i r t u a l l y t h e e n t i r e p o p u l a t i o n is c o v e r e d in t e r m s of h e a l t h c a r e . ( C o v e r a g e of the E A P by p e n s i o n s w a s o n l y 4 7 . 3 p e r c e n t in 1 9 8 8 , alt h o u g h i n d i g e n t s are e n t i t l e d to a s e p a r a t e social a s s i s t a n c e p e n s i o n . ) E v e n if s o m e of the p o o r — m a i n l y in r e m o t e , rural, i s o l a t e d a r e a s — a r e not c o v e r e d by C C S S c u r a t i v e m e d i c i n e , p r a c t i c a l l y all of t h e m a r e r e a c h e d by t h e M H ' s p r e v e n t i v e a n d P H C s e r v i c e s . In 1987 t h e c o m b i n e d M H c o v e r a g e in u r b a n a n d r u r a l a r e a s w a s 5 3 p e r c e n t of t h e total p o p u l a t i o n , t h u s o v e r l a p p i n g with the C C S S c o v e r a g e . Health-care services target other v u l n e r a b l e g r o u p s s u c h as p r e g n a n t w o m e n and i n f a n t s : in 1987, 9 0 . 7 percent of all b i r t h s in t h e c o u n t r y t o o k p l a c e at C C S S f a c i l i t i e s , a n d 8 5 p e r cent of all c h i l d r e n w e r e i m m u n i z e d a g a i n s t the m o s t c o m m o n c o n t a g i o u s d i s e a s e s . T h e s e p r o g r a m s h a v e c o n t r i b u t e d to the i m p r e s s i v e health s t a n d a r d s of that n a t i o n : i n f a n t m o r t a l i t y d e c l i n e d f r o m 7 6 to 13.7 p e r 1 , 0 0 0 f r o m 1 9 6 0 - 1 9 9 0 , a n d l i f e e x p e c t a n c y i n c r e a s e d f r o m 6 3 y e a r s to 7 5 . 8 y e a r s in the s a m e p e r i o d ( C C S S 1988, 1989; M e s a L a g o 1 9 8 9 c , 1 9 9 2 c ) .

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Factors Facilitating

Universalization

O n e i m p o r t a n t q u e s t i o n is h o w C o s t a R i c a , w i t h a r e l a t i v e l y y o u n g p r o gram a s well as f e w e r r e s o u r c e s and l o w e r p e r - c a p i t a i n c o m e than o t h e r c o u n t r i e s , h a s b e e n a b l e to a c c o m p l i s h t h e e l u s i v e t a s k o f u n i v e r s a l i z a t i o n . T h e f o l l o w i n g g e n e r a l f a c t o r s p r o v i d e an e x p l a n a t i o n : ( 1 ) C o s t a R i c a is a relatively small country with no s i g n i f i c a n t t o p o g r a p h i c a l barriers, a very good c o m m u n i c a t i o n system, and a culturally integrated population with o n e o f t h e h i g h e s t li t e r a c y r a t e s in t h e r e g i o n ; ( 2 ) it h a s e n j o y e d p o l i t i c a l s t a b i l i t y a n d p l u r a l i s t i c d e m o c r a c y f o r m o r e t h a n t h r e e d e c a d e s , a n d it h a s no radical d i f f e r e n c e s b e t w e e n

the two m a j o r political parties and

no

a r m e d f o r c e s ( a n d s o d o e s n o t h a v e d e f e n s e e x p e n d i t u r e s ) ; ( 3 ) it h a s t h e s m a l l e s t i n f o r m a l s e c t o r in t h e r e g i o n ( w i t h t h e p r o b a b l e e x c e p t i o n C u b a ) , the s e c o n d h i g h e s t p e r c e n t a g e o f s a l a r i e d w o r k e r s

in t h e

of

labor

f o r c e (i.e., the s e c o n d s m a l l e s t c o m b i n e d s e c t o r o f s e l f - e m p l o y e d , d o m e s tic servants, and unpaid f a m i l y w o r k e r s ) , and o n e o f the lowest rates o f p o v e r t y ; a n d ( 4 ) it h a s a rural s e c t o r t h a t , in s p i t e o f b e i n g o n e o f the f i v e l a r g e s t in L A C , is r e l a t i v e l y p r o s p e r o u s a n d d o e s not e x h i b i t s i g n i f i c a n t i n e q u a l i t i e s in i n c o m e r e l a t i v e to t h e u r b a n s e c t o r . H o w e v e r , t h e s e f a c i l i t a t i n g f a c t o r s s h o u l d not d i m i n i s h t h e

impor-

t a n c e o f a s t e a d y n a t i o n a l p o l i t i c a l c o m m i t m e n t to s o c i a l s e c u r i t y e x p a n s i o n . I m p o r t a n t p o l i c y i n s t r u m e n t s used by C o s t a R i c a have b e e n ( 1 ) a basic public assistance program integrated with social insurance; ( 2 ) fair i n t e g r a t i o n b e t w e e n the C C S S

and M H health s e r v i c e s ; ( 3 )

mandatory

c o v e r a g e o f domestic servants and microenterprises; ( 4 ) voluntary c o v e r age of self-employed,

with a l o w p e r c e n t a g e c o n t r i b u t i o n a s s i g n e d

for

sickness/maternity—an effective average of 5 . 8 percent, c o m p a r e d with 5 . 5 p e r c e n t p a i d b y s a l a r i e d w o r k e r s ( c o n v e r s e l y , the r e s p e c t i v e c o n t r i b u t i o n s f o r p e n s i o n s are 7 . 2 5 p e r c e n t a n d 2 . 5 p e r c e n t , a f a c t that e x p l a i n s t h e l o w c o v e r a g e o f the s e l f - e m p l o y e d in that p r o g r a m ) ; ( 5 ) c o v e r a g e e x t e n sion a g r e e m e n t s b e t w e e n the C C S S and c o o p e r a t i v e s , unions, and a s s o c i a t i o n s o f the s e l f - e m p l o y e d , p e a s a n t s , a n d s i m i l a r g r o u p s ; a n d ( 6 ) e a s y a c c e s s to health care, even for t h o s e w h o lack proper c r e d e n t i a l s as e i t h e r i n s u r e d o r i n d i g e n t ( s e r v i c e s a r e p r o v i d e d , a n d t h e u s e r is t h e n a s k e d to obtain the proper certification) ( M e s a - L a g o

1992c).

A n o t h e r i m p o r t a n t p o l i c y e l e m e n t is f i n a n c i n g : t h e t h r e e m a j o r p r o g r a m s that h a v e f a c i l i t a t e d t h e e x t e n s i o n o f c o v e r a g e b e y o n d t h e s a l a r i e d labor f o r c e r e c e i v e strong state support, are b a s e d on solidarity

transfers,

or operate under a c o m b i n a t i o n o f both. T h e health-care program for ind i g e n t s is e n t i r e l y p a i d f o r b y t h e s t a t e ; it w a s f i n a n c e d at a c o s t o f U . S . $ 2 0 m i l l i o n in 1 9 8 8 : 7 4 . 6 p e r c e n t f r o m d i r e c t s t a t e t r a n s f e r s , 1 8 . 5 p e r c e n t from lottery revenue, and 6 . 9 percent from e a r m a r k e d hospital

stamps.

T h e p u b l i c a s s i s t a n c e p e n s i o n p r o g r a m f o r i n d i g e n t s is f i n a n c e d b y a 5 p e r c e n t p a y r o l l t a x p a i d by e m p l o y e r s p l u s 2 0 p e r c e n t o f t h e s a l e s t a x r e v e n u e ( r e d u c e d t o 1 5 p e r c e n t in t h e m i d - 1 9 8 0 s ) . T h e h e a l t h - c a r e

program

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for s e l f - e m p l o y e d and s e a s o n a l w o r k e r s b e l o w a certain i n c o m e is partly f i n a n c e d by the state; in 1 9 8 8 that g r o u p c o n t r i b u t e d an a v e r a g e of 6 . 6 p e r c e n t of their e a r n i n g s , and the state was e x p e c t e d to c o n t r i b u t e the rem a i n i n g 5 . 6 5 p e r c e n t to c o m p l e t e a total s t a t u t o r y c o n t r i b u t i o n of 12.25 percent ( L o p e z C a s t a n o a n d T o b o n Bernal 1990).

The Financial

Situation

T h e possibility of m a i n t a i n i n g universal c o v e r a g e in the future, with b e n efits that are r e a s o n a b l e in t e r m s of real a m o u n t and quality, will largely be d e p e n d e n t on the e c o n o m i c c a p a c i t y of the state to c o n t i n u e its f i n a n cial support. T h i s will in turn d e p e n d on overall e c o n o m i c p e r f o r m a n c e . In the past the state debt to the s y s t e m (a result of not m e e t i n g all its f i n a n cial o b l i g a t i o n s ) r e a c h e d d a n g e r o u s p r o p o r t i o n s and contributed to s e r i o u s f i n a n c i a l d i f f i c u l t i e s f a c e d by the C C S S . F r o m 1 9 7 5 - 1 9 8 1 the s i c k ness/maternity p r o g r a m f a c e d a g r o w i n g financial deficit that p e a k e d at 2 2 percent of e x p e n d i t u r e s in 1981. O n e m a j o r reason for the deficit w a s that the s t a t e ' s f a i l u r e to f u l f i l l its o b l i g a t i o n s a m o u n t e d to 2 4 p e r c e n t of the p r o g r a m ' s e x p e n d i t u r e s . A l t h o u g h in the rest of the 1980s the g o v e r n m e n t signed debt p a y m e n t a g r e e m e n t s and better f u l f i l l e d its financial c o m m i t m e n t s to the C C S S , state t r a n s f e r s to all three m a j o r p r o g r a m s d i s c u s s e d a b o v e w e r e still partly d e l a y e d (e.g., 31 p e r c e n t of the sales tax r e v e n u e due the C C S S was collected but not paid by the state in 1988). In addition, the state payroll c o n t r i b u t i o n w a s r e d u c e d f r o m 2 percent to 0.75 p e r c e n t , and the proportion of the sales tax g o i n g to the public assistance p e n s i o n p r o g r a m w a s cut f r o m 2 0 p e r c e n t to 15 p e r c e n t . T h e C C S S f o u g h t b a c k and had the c o n t r i b u t i o n p e r c e n t a g e s raised and e x p e n d i t u r e s r e d u c e d through a d j u s t m e n t policies. In spite of these positive steps, h o w e v e r , the real a v e r a g e m o n t h l y p e n s i o n f o r i n d i g e n t s d e c l i n e d 6 0 p e r c e n t f r o m 1 9 7 9 - 1 9 8 8 , f r o m U.S. $ 5 8 to U.S. $ 2 2 ( p u b l i c health e x p e n d i t u r e s per capita in c o n s t a n t colones d e c l i n e d by m o r e than o n e - h a l f f r o m 1 9 8 0 - 1 9 8 9 ) . C C S S a d j u s t m e n t p o l i c i e s have m a n a g e d to turn the d e f i c i t f a c e d by the s i c k n e s s / m a t e r n i t y p r o g r a m into a healthy surplus since 1982; this s u r p l u s p e a k e d at 2 6 p e r c e n t of e x p e n d i t u r e s in 1987. H o w e v e r , inc r e a s e d p e r s o n n e l salaries largely a b s o r b e d that surplus and r e d u c e d it to 3 percent in 1990; these salary increases w e r e g r a n t e d despite the fact that in 1987 the a v e r a g e salary of C C S S p e r s o n n e l w a s the highest in the n a tion a n d w a s t w i c e as high as the a v e r a g e s a l a r y of all the i n s u r e d . A m a j o r catalyst of d i s e q u i l i b r i u m in the p e n s i o n p r o g r a m is the liberal e n t i t l e m e n t c o n d i t i o n s that, c o m b i n e d w i t h m a t u r a t i o n of the p r o g r a m , f o r c e d the use of the r e s e r v e s to pay part of the pensions f r o m 1 9 8 7 - 1 9 8 9 . F u r t h e r m o r e , state t r a n s f e r s to social security are highly s k e w e d in f a v o r of the s p e c i a l i n d e p e n d e n t p e n s i o n p r o g r a m s f o r certain civil s e r v a n t s (these w o r k e r s are c o v e r e d by 19 p r o g r a m s o u t s i d e of the C C S S ) . In 1987,

C H A N G I N G SOCIAL SECURITY: CASES OF REFORM

99

4 2 percent of the total cost of p e n s i o n s w e n t to the 2 0 p e r c e n t of the total n u m b e r of p e n s i o n e r s w h o are in t h o s e s p e c i a l i n d e p e n d e n t p r o g r a m s , w h i l e the r e m a i n i n g 5 8 percent w e n t to the other 8 0 p e r c e n t of C C S S pens i o n e r s i n c l u d i n g both the c o n t r i b u t o r y a n d n o n - c o n t r i b u t o r y p r o g r a m s . T h e state transfer to all p e n s i o n s w a s equal to 1.5 p e r c e n t of G D P , a n d 6 8 p e r c e n t of it w e n t to the civil s e r v a n t s ( A b e l - S m i t h a n d C r e e s e 1988; M e s a - L a g o 1988b; C C S S 1988, 1989; L o p e z C a s t a h o and T o b o n B e r n a l 1990; Cartin C a r r a n z a 1991; M i r a n d a 1991; Q u i r o s C o r o n a d o 1991).

Reforms

to Reduce Costs and Increase

Efficiency

I m p o r t a n t r e f o r m s i n t r o d u c e d in the 1980s and 1 9 9 0 s aim at f u r t h e r red u c i n g costs in both the pension and s i c k n e s s / m a t e r n i t y p r o g r a m s . In 1991 the m i n i m u m ages for early retirement w e r e increased f r o m 5 5 to 60.5 for f e m a l e s and f r o m 57 to 62.5 for m a l e s ; in addition, the r e q u i r e d c o n t r i b u tions were set so as to d i s c o u r a g e r e t i r e m e n t at an early age: the lower the age, the higher the contribution ( C C S S 1990). T h e costly pension p r o g r a m for civil servants w a s r e f o r m e d by a 1992 law. All new a p p o i n t e e s to civil s e r v i c e j o b s are a u t o m a t i c a l l y i n c o r p o r a t e d into the C C S S and their entit l e m e n t c o n d i t i o n s s t a n d a r d i z e d : n o r m a l r e t i r e m e n t is at a g e 6 0 f o r 3 0 y e a r s of c o n t r i b u t i o n or age 6 5 for 20, a n d the base salary is c a l c u l a t e d as the a v e r a g e of the best t w o years a n d a d j u s t e d in the s a m e way as w a g e s . C o n t r i b u t i o n s are 7 percent by the i n s u r e d and 7 p e r c e n t by the e m p l o y e r (i.e., the state) but can be raised to 9 p e r c e n t each if actuarially r e q u i r e d . T h o s e insured by the old p r o g r a m s retain their e n t i t l e m e n t c o n d i t i o n s and benefits. T h e C C S S has been trying to r e d u c e h e a l t h - c a r e costs, i n c r e a s e e f f i ciency, and i m p r o v e the quality of s e r v i c e s by increasingly r e l y i n g on the p r i v a t e s e c t o r and d e c e n t r a l i z i n g its s e r v i c e s . Five p r o g r a m s h a v e b e e n launched: enterprise physicians (EP), mixed medicine (MM), capitation, local health s y s t e m s ( S I L O S ) , and c o n t r a c t s with private p h a r m a c i e s . T h e first t w o p r o g r a m s b e g a n in 1 9 8 2 - 1 9 8 3 w h e n the C C S S s i g n e d a g r e e m e n t s with the private s e c t o r to p r o v i d e a m b u l a t o r y m e d i c a l serv i c e s . In the EP p r o g r a m 7 6 6 e n t e r p r i s e s hire and pay a d o c t o r a n d provide him or her with an o f f i c e and a nurse, and the C C S S s u p p l i e s laboratory and diagnostic services and drugs. U n d e r the M M p r o g r a m the insured selects a physician ( f r o m those enrolled in the p r o g r a m ) and pays for his or her services, and the C C S S provides support services and d r u g s . Both prog r a m s c o m b i n e d served 17 percent of the population c o v e r e d by C C S S in 1989 (two-thirds of those served are in EP and one-third in M M ) ; the annual n u m b e r of consultations per capita averaged 3.6 (higher in EP than in M M ) , slightly higher than the C C S S a v e r a g e of 3.1, but a v e r a g e e x p e n d i t u r e s per capita f o r EP and M M w e r e a b o u t o n e - f o u r t h of the p e r - c a p i t a costs for the entire C C S S (Quiros C o r o n a d o 1991; M e s a - L a g o 1 9 9 2 c ) .

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C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

In 1 9 8 6 a w e l l - k n o w n h e a l t h - c a r e e x p e r t r e c o m m e n d e d t h e British s y s t e m of c a p i t a t i o n f o r the first level of c a r e : the i n s u r e d is a b l e to register w i t h a d o c t o r of his of her c h o i c e , a n d t h e d o c t o r is paid o n a c a p i t a tion b a s i s , i.e., a m o n t h l y p a y m e n t f o r e a c h p a t i e n t r e g i s t e r e d . T h e first pilot p r o g r a m c o v e r e d 2 0 , 0 0 0 i n s u r e d , b u t t h e f r e q u e n c y of c o n s u l t a t i o n w a s the s a m e as in the C C S S , c o s t s w e r e 15 p e r c e n t h i g h e r , a n d t h e use of d r u g s w a s a l s o h i g h e r . H o w e v e r , u s e r s of t h e n e w s y s t e m i n d i c a t e d a h i g h e r d e g r e e of s a t i s f a c t i o n ( 9 0 p e r c e n t ) t h a n t h o s e u s i n g C C S S direct s e r v i c e s ( 6 5 p e r c e n t ) . In a s e c o n d test the p r o g r a m w a s m o d i f i e d (particip a t i n g p h y s i c i a n s r e c e i v e d a brief t r a i n i n g c o u r s e ) and a p p l i e d to three add i t i o n a l c o m m u n i t i e s w i t h r e p o r t e d l y b e t t e r r e s u l t s : d e c l i n e s in c o n s u l t a tion f r e q u e n c y , c o s t s , a n d use of d r u g s ( A b e l - S m i t h a n d C r e e s e 1988; M i r a n d a 1991). T h e S I L O S p r o g r a m , w h i c h b e g a n at t h e e n d of the 1980s, c o n s i s t s of an i n t e g r a t e d h e a l t h - c a r e p r o g r a m that is m a n a g e d by a c o o p e r a t i v e or s e l f - m a n a g e d o r g a n i z a t i o n t h r o u g h a c o n t r a c t with the C C S S a n d the m i n istry of h e a l t h . T h e first e x p e r i m e n t w a s l a u n c h e d in 1988 w i t h a c o o p e r a t i v e o r g a n i z e d in a n e i g h b o r h o o d of t h e c a p i t a l city that has 5 0 , 0 0 0 inh a b i t a n t s . T h e c o o p e r a t i v e n o w h a s 173 h e a l t h p r o f e s s i o n a l s w h o b u y c o - o p s h a r e s . T h e C C S S t r a n s f e r r e d a f u l l y e q u i p p e d c l i n i c to t h e c o - o p (at a c o s t of U . S . $ 1 . 5 m i l l i o n ) f o r t h e p e r i o d of the c o n t r a c t ; t h e C C S S a l s o p a y s a m o n t h l y s u m per user, a n d the M H p a y s a m o n t h l y l u m p s u m . T h e c o - o p provides users with P H C services, curative medicine, drugs, a n d milk to p r e g n a n t w o m e n a n d u n d e r n o u r i s h e d c h i l d r e n . T h e p o p u l a t i o n (both i n s u r e d a n d i n d i g e n t s ) f r e e l y s e l e c t s a p h y s i c i a n f r o m the c o o p e r a tive; the c o - o p is r e s p o n s i b l e f o r all its p e r s o n n e l , must m a i n t a i n the building a n d e q u i p m e n t p r o p e r l y (it is to be r e t u r n e d to t h e C C S S in g o o d s h a p e at the e n d of the c o n t r a c t ) , a n d b u y s all n e e d e d s u p p l i e s a n d inputs. In 1 9 9 0 the cost of o u t p a t i e n t c o n s u l t a t i o n in the c o - o p w a s a b o u t half of that in the C C S S . In the s a m e year a s e c o n d a g r e e m e n t with a n o t h e r c o - o p w a s s i g n e d to c o v e r 5 5 , 0 0 0 p e o p l e , a n d it h a s r e p o r t e d l y h a d s i m i l a r l y g o o d r e s u l t s ( Q u i r o s C o r o n a d o 1 9 9 1 ; M i r a n d a 1991; M e s a - L a g o 1992c). Finally, in 1 9 9 0 the C C S S b e g a n s i g n i n g c o n t r a c t s with p r i v a t e p h a r m a c i e s to r e d u c e d e l a y s in d r u g d e l i v e r i e s to u s e r s a n d e l i m i n a t e l o n g q u e u e s at the C C S S . C o s t s of o p e r a t i o n u n d e r the n e w s y s t e m a r e said to be a b o u t half t h o s e at the C C S S . O t h e r m e a s u r e s p r o p o s e d to r e d u c e c o s t s or i n c r e a s e r e v e n u e s are ( 1 ) a r e c o v e r y of c h a r g e s f r o m the n o n i n s u r e d w h o are c a p a b l e of p a y i n g f o r C C S S s e r v i c e s by i m p r o v i n g the s y s t e m of c o n t r o l ; (2) an i n t r o d u c t i o n of u s e r f e e s f o r c u r a t i v e c a r e a n d d r u g s ( t h i s m e a s u r e h a s b e e n r e j e c t e d by b o t h p o l i t i c a l p a r t i e s a n d u n i o n s ) ; ( 3 ) p a y m e n t of i n s p e c t o r s o n a c o m m i s s i o n r a t h e r t h a n s a l a r y b a s i s ; a n d ( 4 ) f u r t h e r i n t e g r a t i o n of the C C S S a n d M H to e l i m i n a t e c u r r e n t o v e r l a p p i n g , p a r t i c u l a r l y in the provision of preventive services (Abel-Smith and Creese 1988).

C H A N G I N G SOCIAL SECURITY: CASES OF R E F O R M

101

Mexico: A Public Scheme Extended to Rural Areas The Evolution of the Rural Solidarity

Program

In 1 9 5 4 the M e x i c a n institute o f s o c i a l i n s u r a n c e ( I M S S ) s l o w l y b e g a n to e x t e n d its population c o v e r a g e to rural areas to i n c l u d e s a l a r i e d w o r k e r s ( p e r m a n e n t , s e a s o n a l , or t e m p o r a r y ) in agricultural e n t e r p r i s e s and credit s o c i e t i e s , as well as w o r k e r s on s u g a r , t o b a c c o , and sisal m e m b e r o f ejidos,

plantations,

and s o forth. In s p i t e o f the p r o g r e s s m a d e , by

1972

only 13 percent o f the total insured w e r e rural ( c o m p a r e d with 4 0 percent o f the total population). In 1 9 7 3 I M S S launched a w e l f a r e program o f social s o l i d a r i t y — t h e first to depart s i g n i f i c a n t l y f r o m the

conventional

model o f social i n s u r a n c e — t o e x p a n d h e a l t h - c a r e c o v e r a g e for both marginal urban and dispersed rural p o p u l a t i o n s , though the f o c u s w a s on the latter. T h e c o v e r e d rural population r e c e i v e d b a s i c health s e r v i c e s for free in e x c h a n g e for 10 days o f c o m m u n i t y work a year. In 1 9 7 6 , at the height o f the oil b o o m , a national institute to c o o r d i nate aid for marginal z o n e s ( C O P L A M A R ) was e s t a b l i s h e d , and in 1 9 7 9 it d e v e l o p e d an a g r e e m e n t with the I M S S to e x t e n d p r i m a r y health c a r e to m a r g i n a l i z e d rural z o n e s . T h e r a t i o n a l e for this action w a s that, despite the g o o d done by social i n s u r a n c e s , they " c o n t r i b u t e d to the c r e a t i o n o f a minority c o v e r e d against all risks, s i d e - b y - s i d e with a m a j o r i t y e x c l u d e d f r o m all p r o t e c t i o n , [ h e n c e ] there is a n e e d to e n f o r c e the r e d i s t r i b u t i v e f u n c t i o n o f s o c i a l s e c u r i t y b e y o n d the c l a s s i c s c o p e o f s o c i a l i n s u r a n c e " ( I M S S 1 9 8 3 , 15). T h e rural a r e a s in w h i c h to e s t a b l i s h

IMSS-COPLA-

M A R health s e r v i c e s w e r e s e l e c t e d on the b a s i s o f four c r i t e r i a : ( 1 ) 1 9 ind i c a t o r s o f m a r g i n a l i t y ( e . g . , p o v e r t y i n c i d e n c e , high proportion o f noninsured, lack o f health f a c i l i t i e s , c o n c e n t r a t i o n o f Indian p o p u l a t i o n ) ; ( 2 ) k n o w l e d g e o f local c o n d i t i o n s ; ( 3 ) e x i s t e n c e o f m i n i m u m f a c i l i t i e s ( e . g . , roads, e l e c t r i c i t y ) ; and ( 4 ) population s i z e : 5 0 0 - 2 , 5 0 0 inhabitants for c l i n ics and 5 , 0 0 0 - 1 0 , 0 0 0 inhabitants for hospitals. B y 1 9 8 5 , at the peak o f its e v o l u t i o n , I M S S - C O P L A M A R had built 3 , 2 4 6 rural c l i n i c s and 6 5 rural h o s p i t a l s and c o v e r e d 1 4 . 5 m i l l i o n rural i n h a b i t a n t s in 2 4 s t a t e s o f M e x i c o , e q u i v a l e n t to 5 7 p e r c e n t o f the rural p o p u l a t i o n ( 8 7 p e r c e n t o f all Indian g r o u p s ) and 3 0 p e r c e n t o f all the I M S S - p r o t e c t e d p o p u l a t i o n . T h e p o p u l a t i o n c o v e r e d by I M S S - C O P L A M A R was in great need o f health c a r e : it was poor ( 6 9 percent w o r k e d on s u b s i s t e n c e agriculture); it had s o m e o f the n a t i o n ' s highest rates o f infant m o r t a l i t y , death by c o n t a g i o u s and p a r a s i t i c d i s e a s e s , i l l i t e r a c y , and lack o f piped w a t e r and w a s t e disposal s y s t e m s ; it w a s 3 0 - 4 0 p e r c e n t Indian; and 9 6 p e r c e n t o f it w a s in v i l l a g e s or s m a l l t o w n s with l e s s than 2 , 5 0 0 inhabitants. W h e n M i g u e l de la Madrid b e c a m e president, the e c o n o m i c c r i s i s was at its worst, and an adjustment program was soon introduced: priority w a s

102

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

g i v e n to s e r v i c i n g t h e e x t e r n a l d e b t , t h e s t a t e d e f i c i t h a d t o be r e d u c e d , a n d social p r o g r a m s b e c a m e a t a r g e t . D e c e n t r a l i z a t i o n of f e d e r a l s e r v i c e s to t h e s t a t e s w a s r a t i o n a l i z e d on t h e p r e m i s e that the s t a t e s c o u l d h a n d l e t h e m m o r e e f f i c i e n t l y a n d c h e a p l y . In 1 9 8 3 C O P L A M A R w a s d i s b a n d e d ( a l t h o u g h the I M S S r e t a i n e d c o n t r o l of its h e a l t h p r o g r a m ) , but f r o m 1 9 8 5 - 1 9 8 8 b e t w e e n 2 2 a n d 2 9 p e r c e n t of its facilities a n d p o p u l a t i o n w e r e t r a n s f e r r e d to the h e a l t h m i n i s t r i e s of t h e s t a t e s . By t h e e n d of 1 9 8 8 the I M S S r e t a i n e d 2 , 3 2 3 c l i n i c s a n d 51 h o s p i t a l s f o r 10 m i l l i o n p e o p l e in 17 s t a t e s (the p o o r e s t a n d m o s t rural), a n d the states r e c e i v e d 2 9 0 c l i n i c s and 14 h o s p i t a l s f o r f o u r m i l l i o n p e o p l e . T h e I M S S c e a s e d p r o v i d i n g t h e 4 0 p e r c e n t of t h e f u n d i n g it g a v e to t h o s e f a c i l i t i e s that w e r e t r a n s f e r r e d to the states. T h e states t h e m s e l v e s b e c a m e responsible for the financing; this r e p o r t e d l y led to c u t s in a n d d e t e r i o r a t i o n of the t r a n s f e r r e d s e r v i c e s . In 1 9 8 9 t h e d e c e n t r a l i z a t i o n p r o c e s s w a s h a l t e d by P r e s i d e n t S a l i n a s , a n d the 7 0 p e r c e n t s e g m e n t of the p r o g r a m r e t a i n e d by t h e I M S S r e s u m e d its g r o w t h . In 1 9 9 0 it w a s r e n a m e d S o l i d a r i t y ( a n d t h e r e a f t e r I M S S - S ) ; it o p e r a t e d 3 , 0 7 9 c l i n i c s a n d 5 3 h o s p i t a l s a n d c o v e r e d a b o u t 11.3 m i l l i o n rural p e o p l e , or 31 p e r c e n t of the total p o p u l a t i o n p r o t e c t e d by the I M S S . In c o n t r a s t , the I M S S ' s r e g u l a r i n s u r a n c e p r o g r a m f o r r u r a l w o r k e r s c o v e r e d only 1.8 m i l l i o n p e o p l e , or 5 . 3 p e r c e n t of the total i n s u r e d .

Organization

of the Rural

Solidarity

Program

T h e I M S S - S c o v e r s the h e a d of the h o u s e h o l d , his or her s p o u s e or c o m p a n i o n , a n d d e p e n d e n t c h i l d r e n a n d p a r e n t s . A b o u t half of t h o s e c o v e r e d a r e f e m a l e s , a n d a b o u t half are less than 15 y e a r s old; m o t h e r s and child r e n a r e p r i m a r y u s e r s of c l i n i c s e r v i c e s . B e n e f i c i a r i e s are e n t i t l e d to h e a l t h - c a r e s e r v i c e s at the first level in I M S S - S c l i n i c s , at t h e s e c o n d level in the p r o g r a m h o s p i t a l s , and at the third level in s p e c i a l i z e d h o s p i t a l s of the s e c r e t a r i a t of h e a l t h ( S S ) b u t not in I M S S - S h o s p i t a l s . T h e p e r c e n t a g e d i s t r i b u t i o n s of the t e n d e d p o p u l a t i o n by level are 8 5 p e r c e n t , 12 p e r c e n t , a n d 3 p e r c e n t , r e s p e c t i v e l y . C l i n i c s a n d h o s p i t a l s are o p e n 2 4 h o u r s a d a y . T h e s p e c i f i c s e r v i c e s p r o v i d e d by all t h r e e l e v e l s ( f r e e of c h a r g e ) are det e c t i o n a n d c o n t r o l of c h r o n i c d i s e a s e s ; p r e v e n t i o n a n d i m m u n i z a t i o n of c o n t a g i o u s d i s e a s e s ; c u r a t i v e m e d i c a l / h o s p i t a l c a r e at t h e t h r e e l e v e l s ; m e d i c i n e s ; f a m i l y p l a n n i n g ; h e a l t h e d u c a t i o n ; and p r o m o t i o n of or g u i d a n c e on e n v i r o n m e n t a l h e a l t h , s a n i t a t i o n , n u t r i t i o n , a n d h o u s i n g i m p r o v e m e n t . B e n e f i c i a r i e s are e x p e c t e d to c o n t r i b u t e s u c h f o r m s of c o m m u n i t y w o r k as h e a l t h - c a r e a s s i s t a n c e , s e w a g e a n d g a r b a g e d i s p o s a l , h o m e i m p r o v e m e n t , pest c o n t r o l , a n d c o n s t r u c t i o n of w a t e r a n d d r a i n a g e s y s t e m s ( a l t h o u g h s e r v i c e is rarely d e n i e d to t h o s e w h o r e f u s e to w o r k ) . B e c a u s e all t h e I M S S - S c l i n i c s a r e t h e s a m e t h r o u g h o u t M e x i c o , t h e u n i q u e m o d e l is c r i t i c i z e d f o r not b e i n g a d a p t e d to d i v e r s e local c o n d i t i o n s . S e r v i c e s p r o v i d e d by t h e c l i n i c s i n c l u d e p r i m a r y health c a r e ,

C H A N G I N G S O C I A L SECURITY: CASES O F R E F O R M

103

outpatient consultation, m o t h e r / i n f a n t care, m i n o r surgeries, m e d i c i n e s (from a basic list), and c o m m u n i t y services. T h e clinics are s t a f f e d with one pasante (a medical student in the last year of school w h o has to give one year of social service) or a recently g r a d u a t e d physician (also hired for one year), and two clinic assistants. At the beginning, the program basically relied on pasantes, but by 1986, 72 percent were contract doctors, resulting in higher costs. There are heavy d e m a n d s on each d o c t o r ' s time and skills, and the doctors normally try to avoid posts in the most isolated communities (when a doctor cannot be hired, a rural health technician— trained in six m o n t h s — p e r f o r m s the job). T h e d o c t o r ' s brief time of service, c o m b i n e d with language and cultural d i f f e r e n c e s , usually prevents him or her from establishing close contact with the population. Clinic assistants are mostly young w o m e n recruited f r o m the community w h o have completed primary school and are bilingual in Spanish and the local Indian language. Because of their age and low level of formal education, they have little autonomy and their role is limited. Hospitals have between 10 and 70 beds, serve 40 clinics, and provide both primary health care to the inhabitants of the immediate area and secondary health care for patients referred f r o m a s u r r o u n d i n g area of approximately 2 0 0 , 0 0 0 inhabitants. T h e y are s t a f f e d with physicians, pasantes, and other professionals as well as assistants; they o f f e r emergency services, outpatient consultation, diagnostic services, dental care, medicines, and hospitalization. A surgeon heads a staff of residents in family medicine, pediatrics, obstetrics and gynecology, general surgery, internal medicine, and anesthesiology. C o m m u n i t y participation is good at the local level but poor or nil at state and federal levels. Locally there are v o l u n t e e r s , assistants, and a health c o m m i t t e e . Volunteers o v e r s e e the health needs of 10 families each, help in the clinic, and learn basic nursing skills. Assistants provide rudimentary health services in outreach c o m m u n i t i e s , for which they receive a token salary that is i n s u f f i c i e n t and thus contributes to a high dropout rate. T h e health c o m m i t t e e m a i n t a i n s the clinic, transports supplies, assesses c o m m u n i t y needs, and helps deliver services. Clinic personnel are encouraged to plant medicinal herb g a r d e n s and e x c h a n g e inf o r m a t i o n and patients with traditional m e d i c i n e practitioners, but competition and friction often exist. Relationships with midwives are better: in many communities, m i d w i v e s deliver most babies and send highrisk patients to the clinic personnel; the clinics train m i d w i v e s and allocate medical supplies to them to promote family planning and safe births. In 1989 there were 6,348 midwives and 4,202 traditional doctors cooperating with the IMSS-S. The original social solidarity program of 1 9 7 3 - 1 9 7 8 was financed (in terms of construction, equipment, and operational costs) 60 percent by the federal government and 40 percent by the IMSS. When I M S S - C O P L A M A R

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w a s e s t a b l i s h e d in 1 9 7 9 , t h e f e d e r a l g o v e r n m e n t a g r e e d to pay all c o s t s ( c a p i t a l a n d c u r r e n t ) of t h e n e w p r o g r a m , a n d the s o c i a l s o l i d a r i t y p r o g r a m c o n t i n u e d w i t h the s a m e level of f i n a n c i n g . I n d i r e c t s u p p o r t to C O P L A M A R by the I M S S a n d later t h e I M S S - S ( e . g . , s e r v i c e s s u c h as p l a n n i n g a n d s u p e r v i s i o n , use of a d m i n i s t r a t i v e f a c i l i t i e s a n d e q u i p m e n t , t r a i n i n g , a n d c o n s u l t a t i o n ) h a s b e e n e s t i m a t e d by I M S S to be as high as 5 0 p e r c e n t of total p r o g r a m c o s t s , but this f i g u r e is p r o b a b l y i n f l a t e d . C u r r e n t f i n a n c i n g to the I M S S - S is the s a m e as it w a s to I M S S - C O P L A M A R .

Efficiency

and Impact

on Health

Standards

T h e I M S S - S s t r e s s e s l o w - c o s t m e d i c a l s e r v i c e s , p a r t l y by e m p h a s i z i n g p r e v e n t i o n and c l i n i c - b a s e d s e r v i c e s that s a t i s f y 8 5 p e r c e n t of the d e m a n d a n d are m u c h c h e a p e r than h o s p i t a l s e r v i c e s . T h e p r o g r a m ' s 1986 b u d g e t w a s 4 5 . 5 p e r c e n t f o r c u r a t i v e s e r v i c e s and 2 7 . 9 p e r c e n t f o r p r e v e n t i o n ; the latter w a s far a b o v e the s h a r e of any o t h e r health i n s t i t u t i o n in the n a t i o n (e.g., the S S spent 17.4 p e r c e n t on p r e v e n t i o n , the I M S S s p e n t 2.3 p e r c e n t , a n d the a v e r a g e f o r the w h o l e health s e c t o r w a s 5 p e r c e n t ) . F u r t h e r m o r e , p r e v e n t i o n h a s b e e n g i v e n i n c r e a s i n g a t t e n t i o n in r e c e n t y e a r s . H o s p i t a l e f f i c i e n c y s h o w s an i n c r e a s i n g t r e n d . T h e rate of hospital o c c u p a n c y g r a d ually rose f r o m 4 2 p e r c e n t in 1980 to 6 7 p e r c e n t in 1982 a n d 8 3 p e r c e n t in 1 9 8 5 - 1 9 8 6 ; the a v e r a g e n u m b e r of d a y s of stay d e c r e a s e d f r o m 4 . 0 in 1 9 8 3 to 3.3 f o r 1 9 8 6 - 1 9 8 9 . A l t h o u g h the I M S S has not p r o v i d e d d a t a on hospital o c c u p a n c y s i n c e 1981, its a v e r a g e n u m b e r of d a y s of stay in 1989 w a s 4.4, 33 p e r c e n t h i g h e r than that of the I M S S - S . H o w e v e r , the p o o r e s t a n d most i n d i g e n o u s s t a t e s a r e r e p o r t e d to h a v e the l o w e s t h o s p i t a l o c c u p a n c y r a t e s : in 1 9 8 6 O a x a c a ' s r a t e w a s 61 p e r c e n t , l a r g e l y b e c a u s e of t r a n s p o r t a t i o n d i f f i c u l t i e s a n d c u l t u r a l b a r r i e r s to u s i n g i n s t i t u t i o n a l serv i c e s . I M S S - S o f f i c i a l s c l a i m that its e x p e n d i t u r e s p e r c a p i t a ( U . S . $ 7 in 1 9 8 9 ) are the l o w e s t of any h e a l t h - c a r e p r o g r a m in the n a t i o n . In 1 9 8 7 t h e r a t i o s of p e r - c a p i t a e x p e n d i t u r e s of o t h e r p r o g r a m s r e l a t i v e to the I M S S S p r o g r a m w e r e as f o l l o w s : 5 . 8 t i m e s h i g h e r f o r the S S , 8 . 2 t i m e s h i g h e r f o r the civil s e r v a n t institute ( I S S S T E ) , 9 . 2 t i m e s h i g h e r f o r the I M S S , a n d 2 4 t i m e s h i g h e r f o r the p e t r o l e u m w o r k e r s institute ( P E M E X ) . E v e n c o n s i d e r i n g that t h e c o s t of I M S S i n s t i t u t i o n a l ( i n d i r e c t ) s u p p o r t is n o t inc l u d e d in t h e s e c a l c u l a t i o n s , t h e I M S S - S still a p p e a r s to b e the least e x p e n s i v e p r o g r a m in M e x i c o . E v a l u a t i n g the i m p a c t of I M S S - S o n rural p o p u l a t i o n h e a l t h s t a n d a r d s is d i f f i c u l t b e c a u s e (1) little i n f o r m a t i o n is a v a i l a b l e on the s e r v i c e s t r a n s f e r r e d to the s t a t e s , w h i c h m a k e s c o m p a r i s o n s b e f o r e a n d a f t e r 1 9 8 5 d i f f i c u l t ; ( 2 ) b e c a u s e of t h e e c o n o m i c c r i s i s , t h e I M S S - S b u d g e t w a s c u t ( p e r - c a p i t a e x p e n d i t u r e s w e r e h a l v e d f r o m 1 9 8 2 - 1 9 8 6 ) , l e a d i n g to r e d u c t i o n s in p e r s o n n e l a n d s u p p l i e s ; a n d ( 3 ) t h e p r o g r a m s u c c e s s rate v a r i e s significantly a m o n g c o m m u n i t i e s d e p e n d i n g on geographic accessibility,

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p r e v i o u s living s t a n d a r d s , e t h n i c i t y , local a u t h o r i t y s u p p o r t , a n d t h e p r e s e n c e of s k i l l e d p e r s o n n e l . T h e u n p r e c e d e n t e d c o m m i t m e n t of f e d e r a l f u n d s a n d I M S S r e s o u r c e s p e r m i t t e d the p r o g r a m to d e v e l o p a h e a l t h serv i c e i n f r a s t r u c t u r e in m o s t r e m o t e r u r a l a r e a s of M e x i c o w i t h i n a s h o r t t i m e s p a n and to s u c c e e d in d e l i v e r i n g f r e e i n s t i t u t i o n a l h e a l t h c a r e to the rural p o o r , w h o had p r a c t i c a l l y no p r o t e c t i o n b e f o r e . T h e f o r m i d a b l e task of c o n s t r u c t i n g , m a i n t a i n i n g , a n d s u p p l y i n g c l i n i c s , e v e n in g e o g r a p h i cally i s o l a t e d areas, has g e n e r a l l y b e e n s u c c e s s f u l . T h e r e m a y h a v e b e e n a d e c l i n e in p o p u l a t i o n c o v e r a g e a n d s e r v i c e s f r o m 1 9 8 6 - 1 9 8 8 ( w h e n t h e d e c e n t r a l i z a t i o n p r o c e s s t o o k p l a c e ) , b u t later t h e r e w a s an i n c r e a s e in b o t h p o p u l a t i o n c o v e r a g e a n d f a c i l i t i e s , at least in the t w o - t h i r d s of t h e p r o g r a m r e t a i n e d by I M S S . C o m p a r a b l e d a t a on I M S S a n d I M S S - S s e r v i c e a n d p e r s o n n e l r a t e s s h o w that t h e p o p u l a t i o n c o v e r e d by the f o r m e r (i.e., the i n s u r e d ) r e c e i v e s m u c h m o r e s e r v i c e s per capita than the latter; e.g., in 1 9 8 6 the p o p u l a t i o n c o v e r e d b y the I M S S r e c e i v e d c o v e r a g e f o r 1 , 3 5 7 t i m e s m o r e c o n s u l t a tions, 3 , 2 2 5 times more child deliveries, 3,350 times more surgery, and 26,650 more X-rays. Nevertheless, immunization rates are similar within both p o p u l a t i o n s , and the rural p o o r r e c e i v e o t h e r b a d l y n e e d e d p r e v e n t i o n s e r v i c e s a n d d i s e a s e t r e a t m e n t s not a v a i l a b l e to the u r b a n - l M S S i n s u r e d p o p u l a t i o n . Most services rates (per 10,000 people c o v e r e d ) increased s u b s t a n t i a l l y b e t w e e n 1 9 8 0 - 1 9 8 2 a n d 1 9 8 6 : f r o m 5 0 - 3 7 0 p e r c e n t in p r e v e n t i o n a n d s a n i t a t i o n s e r v i c e s , 5 0 - 1 0 0 p e r c e n t in t r e a t m e n t of p r i o r i t i z e d d i s e a s e s , a n d 1 6 - 1 0 0 p e r c e n t in all h o s p i t a l s e r v i c e s ( t h o u g h r a t e s of clinical s e r v i c e s d e c l i n e d ) . M o r b i d i t y r a t e s f o r 1 9 8 3 - 1 9 8 9 n e e d to be interp r e t e d w i t h c a u t i o n but i n d i c a t e s i g n i f i c a n t d e c l i n e s f r o m 1 9 8 3 - 1 9 8 6 in p r a c t i c a l l y all t r a n s m i t t a b l e d i s e a s e s (by 1 1 - 6 5 p e r c e n t , a c c o r d i n g to d i f f e r e n t e s t i m a t e s ) , s u c h as i n f l u e n z a , e n t e r i t i s , a c u t e tonsillitis, a m e b i a s i s , e t c . ( o n l y s c a b i e s r a t e s i n c r e a s e d ) . R a t e s of i m m u n o p r e v e n t a b l e d i s e a s e s also d e c l i n e d (by 2 9 - 8 3 p e r c e n t ) f o r p o l i o , p e r t u s s i s , m e n i n g i t i s , t e t a n u s , m e a s l e s , a n d t u b e r c u l o s i s ( t h o u g h h u m a n r a b i e s a n d t y p h o i d r a t e s inc r e a s e d ) . A l t h o u g h the d e c l i n e in s u c h r a t e s c a n n o t b e a s s u m e d to b e an e x c l u s i v e r e s u l t of I M S S - S p r e v e n t i o n a n d s a n i t a t i o n s e r v i c e s , t h e s e serv i c e s h a v e p l a y e d a p o s i t i v e role in r e d u c i n g rural m o r b i d i t y . M o r e r e c e n t d a t a , w h o s e a c c u r a c y c o u l d not be c h e c k e d , r e p o r t that by 1 9 8 8 p o l i o had b e e n v i r t u a l l y e r a d i c a t e d and that f r o m 1 9 8 5 - 1 9 8 9 t h e f o l l o w i n g d e c l i n e s o c c u r r e d : m a l n u t r i t i o n w e n t f r o m 3 5 p e r c e n t to 2 3 p e r c e n t , c h i l d d e h y d r a tion d u e to d i a r r h e a f r o m 12.6 p e r c e n t to 5 . 8 p e r c e n t , a n d c h i l d m o r t a l i t y f r o m 8 . 5 p e r c e n t to 6 p e r c e n t ( M e s a - L a g o 1 9 9 2 c ; S h e r r a d e n 1 9 8 9 ) .

Current

Problems

and Needed

Assessments

A l t h o u g h t h e r e is little r o o m f o r d o u b t o n t h e g o o d p e r f o r m a n c e of t h e I M S S - S , s o m e p r o b l e m s r e m a i n and n e w o n e s h a v e a p p e a r e d : ( 1 ) d e c l i n e s

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in rates of all clinic services such as outpatient consultation, prescriptions, and minor surgery; (2) inadequate coverage of the mother/infant group (in 1989 only 52 percent of p r e g n a n t w o m e n and 45 percent of deliveries were treated institutionally or by qualified midwives); (3) a reduction in budgetary allocations that contributed to a 55 percent decline in per-capita expenditures from 1 9 8 2 - 1 9 8 6 (this could also have been the result of increasing efficiency); (4) delays of state payments to the IMSS-S in 1987 that forced the IMSS to divert f u n d s f r o m other programs (this problem was corrected in 1988); (5) a reduction in the number of pasanles and in the ratio of nursing personnel to physicians (both of which have increased costs); and (6) insufficient participation of the covered population in health-care activities. To further improve its p e r f o r m a n c e , the IMSS-S program should have first priority in the allocation of federal f u n d s , and some changes should be introduced: (1) prevention, sanitation, and the use of local paramedic personnel should be further emphasized over curative medicine and physicians; (2) the single health model should b e c o m e more diversified to take into account s p e c i f i c features and needs of the villages; (3) c o m m u n i t y participation through health committees should be strengthened; (4) physicians should be trained b e f o r e b e i n g assigned and should spend at least two or three years in a rural post to be able to learn from the community and be accepted by it (in order to attract more physicians, they should be sensitized to the national i m p o r t a n c e of this program while in medical school and have proper material incentives offered to them); (5) administrative procedures should be simplified to increase the time personnel devote to health functions; (6) qualified clinic assistants must be given more responsibility and training to perform more important tasks, and the number and roles of health volunteers should be expanded and their stipends raised; and (7) c o m m u n i t y w o r k , done in e x c h a n g e for health services, should be s p e c i f i e d and tailored to c o m m u n i t y needs, resources, and interests ( I M S S 1983, 1988, 1990a, 1991b; I M S S - C O P L A M A R 1987a, 1987b, 1987c, 1988a, 1988b; I M S S - S o l i d a r i d a d 1991; Velazquez 1989, 1990, 1991; Sherraden 1989; M e s a - L a g o 1992c).

Jamaica: A Universal Public Scheme with Marginal Privatization in Health Care Prior to gaining independence, Jamaica had social insurance and social assistance o l d - a g e pensions for sugar w o r k e r s , a general social assistance program, and a national public health program. After Jamaica became independent in 1965, the National Insurance Act (the first in the NLC) introduced social insurance p e n s i o n s and grants. The National Insurance Scheme (NIS) began to function in 1966, covering all the employed labor

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f o r c e in the p r i v a t e a n d p u b l i c s e c t o r s ( i n c l u d i n g the a r m e d f o r c e s , t h o u g h civil s e r v a n t s h a v e a s p e c i a l p r o g r a m ) as w e l l as s u g a r w o r k e r s . M a n d a tory c o v e r a g e of the s e l f - e m p l o y e d a n d f a r m e r s , as w e l l as a v o l u n t a r y p r o g r a m for the rest of the l a b o r f o r c e , w e r e a d d e d in 1 9 6 8 . A c o m p u l s o r y e m p l o y m e n t i n j u r y p r o g r a m ( f o r all t h e e m p l o y e d ) a n d a m a t e r n i t y all o w a n c e p r o g r a m for d o m e s t i c w o r k e r s w e r e i n t r o d u c e d in 1 9 7 0 and 1 9 7 9 , respectively. A public assistance program ( P A P ) m a n a g e s several prog r a m s f o r t h e n o n i n s u r e d d i s p o s s e s s e d . T h e M i n i s t r y of L a b o r , W e l f a r e , a n d S p o r t s ( M L W S ) is r e s p o n s i b l e f o r the N I S and t h e P A P , but the t w o p r o g r a m s are c o m p l e t e l y s e p a r a t e d . T h e M i n i s t r y of H e a l t h ( M H ) is res p o n s i b l e f o r all p u b l i c h e a l t h - c a r e s e r v i c e s , b o t h p r e v e n t i v e a n d c u r a t i v e at all levels, t h r o u g h 3 7 5 health c e n t e r s a n d 2 4 h o s p i t a l s t h r o u g h o u t the island. T h e r e is an e x t e n d e d s y s t e m of p r i v a t e health i n s u r a n c e ( B l u e C r o s s / B l u e S h i e l d ) as well as p r i v a t e health s e r v i c e s , i n c l u d i n g six h o s p i t a l s , but the h o s p i t a l s s e r v e a v e r y s m a l l p e r c e n t a g e of the p o p u l a t i o n ( M e s a - L a g o 1987a). T h i s section a n a l y z e s the N I S , P A P , and M H p r o g r a m s s e p a r a t e l y .

Social

Insurance

T h e N I S p r o v i d e s (1) p e n s i o n s f o r o l d a g e , d i s a b i l i t y , a n d s u r v i v o r s ; ( 2 ) g r a n t s ( l u m p s u m s ) f o r t h e i n s u r e d w h o d o not q u a l i f y f o r p e n s i o n s b u t h a v e m a d e a m i n i m u m n u m b e r of c o n t r i b u t i o n s ; ( 3 ) f u n e r a l g r a n t s ; ( 4 ) e m p l o y m e n t injury benefits including medical care, temporary disability payments, and permanent disability pensions; and (5) a special p r o g r a m f o r s u g a r w o r k e r s . T h e N I S d o e s not p r o v i d e s i c k n e s s a n d m a t e r n i t y p a i d l e a v e s ( e x c e p t f o r m a t e r n i t y l e a v e s f o r d o m e s t i c s e r v a n t s ) , f a m i l y all o w a n c e s , or u n e m p l o y m e n t c o m p e n s a t i o n ( M L W S 1 9 9 0 b ) . T h e rate of open u n e m p l o y m e n t r e a c h e d 2 7 p e r c e n t of the l a b o r f o r c e in 1 9 8 2 ( u n o f f i c i a l f i g u r e s w e r e as h i g h as 3 0 p e r c e n t ) , b u t as t h e e c o n o m y e x p e r i e n c e d a m o d e s t r e c o v e r y , t h e u n e m p l o y m e n t rate s t e a d i l y dec l i n e d to 15.7 p e r c e n t in 1990. Still, this is a very h i g h rate, a n d t h e r e has b e e n d i s c u s s i o n on w h e t h e r u n e m p l o y m e n t i n s u r a n c e s h o u l d b e i n t r o duced. From 1 9 8 0 - 1 9 8 9 government officials argued that—with unemp l o y m e n t a m a s s i v e , c h r o n i c p h e n o m e n o n in J a m a i c a — i t w a s f i n a n c i a l l y u n f e a s i b l e to i n t r o d u c e u n e m p l o y m e n t i n s u r a n c e ; s c a r c e r e s o u r c e s s h o u l d i n s t e a d b e u s e d to c r e a t e n e w , p r o d u c t i v e j o b s , a n d t h e j o b l e s s s h o u l d m o d e s t l y be h e l p e d w i t h p u b l i c a s s i s t a n c e . E m p l o y e r s o p p o s e an u n e m p l o y m e n t p r o g r a m largely b e c a u s e it w o u l d i n c r e a s e payroll c o n t r i b u t i o n s , b u t u n i o n l e a d e r s are in f a v o r of o n e . T h e p o l i t i c a l l e a d e r s h i p in p o w e r s i n c e 1 9 8 9 h a s p r o p o s e d in their p l a n f o r 1990—1994 t h e c r e a t i o n of u n e m p l o y m e n t i n s u r a n c e w i t h the f o l l o w i n g a r r a n g e m e n t : t h o s e e m p l o y e d w i t h 2 6 w e e k l y c o n t r i b u t i o n s w o u l d be e l i g i b l e ( a f t e r a 14-day w a i t i n g p e r i o d ) f o r c o m p e n s a t i o n e q u a l to 6 0 - 7 5 p e r c e n t of t h e i n s u r e d w a g e f o r 13 w e e k s . T h e c u r r e n t f i v e - y e a r p l a n a l s o p r o p o s e s ( 1 ) a r e d u c t i o n in t h e

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m a l e a g e of r e t i r e m e n t f r o m 6 5 to 6 0 y e a r s of a g e , to m a t c h t h e f e m a l e age of r e t i r e m e n t ; (2) the i n t r o d u c t i o n of a p a i d sick l e a v e e q u a l to 7 5 percent of the i n s u r e d w a g e ; ( 3 ) e x t e n s i o n of e m p l o y m e n t i n j u r y b e n e f i t s to the s e l f - e m p l o y e d , f a r m e r s , d o m e s t i c s e r v a n t s , and t h e a r m e d f o r c e s ; and (4) i m p r o v e m e n t of c u r r e n t b e n e f i t s a v a i l a b l e to the d i s a b l e d , w i d o w s , and o t h e r s u r v i v o r s . T h e p l a n , h o w e v e r , d o e s not c o n s i d e r an i n c r e a s e in c o n t r i b u t i o n s to s u p p o r t t h e s e n e w p r o g r a m s ( M L W S 1 9 9 0 a ) . A n a c t u a r i a l f i r m that w a s c o n s u l t e d on t h o s e c h a n g e s o p p o s e d t h e r e d u c t i o n in the m a l e a g e of r e t i r e m e n t a n d r e c o m m e n d e d instead that the a g e f o r f e m a l e s be i n c r e a s e d to 6 5 ( C o k e 1 9 9 0 ) . S t a t i s t i c s on N I S p o p u l a t i o n c o v e r a g e s i g n i f i c a n t l y o v e r e s t i m a t e registration of the i n s u r e d b e c a u s e of d u p l i c a t i o n (i.e., p e o p l e r e g i s t e r e d m o r e than o n c e ) a n d t h e c o n t i n u e d i n c l u s i o n of t h o s e w h o h a v e e m i g r a t e d o r w i t h d r a w n f r o m the s c h e m e (although the retired and dead are now d e l e t e d f r o m r e g i s t r a t i o n ) . In 1 9 8 5 t h e n u m b e r of t h o s e r e g i s t e r e d f o r p e n s i o n s a n d g r a n t s w a s s l i g h t l y h i g h e r t h a n the labor f o r c e ; r e g i s t r a t i o n f o r e m p l o y m e n t i n j u r y w a s s l i g h t l y s m a l l e r b e c a u s e the s e l f - e m p l o y e d are not e n t i t l e d to s u c h b e n e f i t s . W h e n r e g i s t r a t i o n f i g u r e s w e r e a d j u s t e d to acc o u n t f o r the d i s t o r t i o n s , the p r o p o r t i o n of the labor f o r c e i n s u r e d w a s 9 3 p e r c e n t . But if the n u m b e r of a c t i v e c o n t r i b u t o r s w a s u s e d instead, c o v e r a g e of the l a b o r f o r c e d e c l i n e d to 5 7 . 6 p e r c e n t . D a t a on r e g i s t r a t i o n ( a d j u s t e d or n o t ) o r a c t i v e c o n t r i b u t o r s are not a v a i l a b l e a f t e r 1985. T h e n u m ber of s e l f - e m p l o y e d in 1 9 8 7 w a s 3 5 2 , 9 0 0 ( o n e - t h i r d of t h e labor f o r c e ) , but o n l y 1 9 , 0 0 0 w e r e r e g i s t e r e d ( 5 . 3 p e r c e n t ) , and a m o n g t h e m only 8 , 4 0 0 w e r e a c t i v e c o n t r i b u t o r s (2.4 p e r c e n t ) . In 1982, 17 p e r c e n t of the p o p u l a tion in the p e n s i o n a b l e a g e b r a c k e t w a s r e c e i v i n g p e n s i o n s ; the p r o p o r t i o n i n c r e a s e d to 2 3 p e r c e n t in 1 9 9 0 , b u t t h e v a s t m a j o r i t y w a s still not c o v e r e d . N o n c o m p l i a n c e is a s e r i o u s p r o b l e m : in 1987, 4 4 p e r c e n t of t h e registered e m p l o y e r s ( i n c l u d i n g 2 3 p e r c e n t of p u b l i c - s e c t o r e m p l o y e r s ) w e r e in a r r e a r s , a n d that f i g u r e e x c l u d e s e v a s i o n . R e a s o n s f o r this p r o b l e m inc l u d e e x c e s s i v e p a p e r w o r k f o r r e g i s t r a t i o n , p a y m e n t s , a n d r e p o r t i n g ; very low b e n e f i t s a n d c u m b e r s o m e , p r o t r a c t e d p r o c e d u r e s to c l a i m t h e m ; lack of an u p - t o - d a t e list of t h o s e w h o a r e n o n c o m p l i a n t ; a n d i n e f f i c i e n t prose c u t i o n of d e l i n q u e n t e m p l o y e r s . A p r o c e s s of c o m p u t e r i z a t i o n , i n i t i a t e d in 1 9 8 7 a n d e x p a n d e d u n d e r the 1 9 9 0 - 1 9 9 4 plan, is e x p e c t e d to c l e a n u p the r e g i s t r a t i o n d a t a a n d p r o v i d e a s o l i d b a s e f o r e s t i m a t i n g c o v e r a g e and fighting evasion and p a y m e n t delays. Other i m p r o v e m e n t m e a s u r e s are the c o n d i t i o n i n g of i m p o r t p e r m i t s to an e m p l o y e r ' s c o m p l i a n c e and a coll a b o r a t i o n b e t w e e n the N I S a n d t h e I n t e r n a l R e v e n u e D e p a r t m e n t ( M e s a L a g o 1 9 8 7 a , 1 9 9 0 c ; M L W S 1 9 9 0 a ; PIJ 1 9 9 0 ; SIJ 1 9 9 0 a ) . In a d d i t i o n to the a b o v e - m e n t i o n e d d i f f i c u l t i e s in e x t e n d i n g c o v e r a g e to t h e s e l f - e m p l o y e d a n d c o n t r o l l i n g n o n c o m p l i a n c e , t h e N I S c o n f r o n t s several p r o b l e m s : ( 1 ) l o w l e v e l s of b e n e f i t s and c o n t r i b u t i o n s ; (2) i n a d e q u a t e p e r s o n n e l s k i l l s a n d l o n g d e l a y s in t h e p r o c e s s i n g of b e n e f i t s ;

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( 3 ) p o o r i n v e s t m e n t p e r f o r m a n c e ; a n d ( 4 ) a lack of r e g u l a r evaluations.

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T h e level of N I S b e n e f i t s is e x t r e m e l y low, partly b e c a u s e of a n o t o riously i n s u f f i c i e n t f l a t - r a t e p e n s i o n and a w a g e - r e l a t e d p e n s i o n limited by a l o w c e i l i n g on c o n t r i b u t i o n s . F r o m 1 9 8 0 - 1 9 8 7 i n f l a t i o n r e d u c e d the a v e r a g e real i n s u r a n c e p e n s i o n by 14 p e r c e n t ; m e a s u r e d in U . S . d o l l a r s t h e m o n t h l y p e n s i o n d e c l i n e d by $ 3 8 . 5 0 to $ 1 4 . 6 0 . In m i d - 1 9 8 7 N I S m o n e tary b e n e f i t s w e r e raised by 100 p e r c e n t to 150 p e r c e n t , a n d n e w i n c r e a s e s ( r a n g i n g f r o m 2 0 - 6 0 p e r c e n t ) took p l a c e in 1990. In 1 9 9 0 the a v e r a g e real i n s u r a n c e p e n s i o n w a s a l m o s t 5 0 p e r c e n t a b o v e the 1 9 8 0 level but w a s no h i g h e r t h a n the 1983 level, and it e q u a l e d U . S . $ 2 9 . 5 0 m o n t h l y ( M e s a L a g o 1 9 8 7 a , u p d a t e d w i t h PIJ 1 9 8 8 - 1 9 9 1 ; c o n v e r s i o n s in U . S . d o l l a r s b a s e d o n I D B 1991). T h e N I S l a c k s a s t r u c t u r a l m e c h a n i s m to a d j u s t its b e n e f i t s to m a t c h i n f l a t i o n , a n d the 1 9 9 0 - 1 9 9 4 plan h a s p r o p o s e d e i t h e r to a d j u s t s u c h b e n e f i t s a u t o m a t i c a l l y to 75 p e r c e n t of the n a t i o n a l m i n i m u m w a g e or to a d j u s t b e n e f i t s a n d c o n t r i b u t i o n s (as well as their c e i l i n g ) e v e r y o t h e r y e a r ( M L W S 1990a). C i v i l s e r v a n t s ( w i t h i n N I S ) e n j o y s u p e r i o r b e n e f i t s a n d m o r e liberal e n t i t l e m e n t c o n d i t i o n s than the rest of the i n s u r e d : m a l e s c a n retire at a g e 6 0 ( i n s t e a d of 6 5 ) , and with 33 y e a r s of s e r v i c e , r e t i r e m e n t is p o s s i b l e at 5 5 f o r b o t h s e x e s ; d o u b l e p e n s i o n s are a l l o w e d , a n d p e n s i o n e r s b e l o w a c e r t a i n a g e may c o n t i n u e to w o r k ; a n d p a i d sick l e a v e a n d B C / B S c o v e r a g e ( h a l f p a i d by the s t a t e ) are p r o v i d e d . B e c a u s e of t h e s e e x c e p t i o n a l b e n e f i t s , in 1989, 26.5 p e r c e n t of all social s e c u r i t y e x p e n d i t u r e s w e n t to civil s e r v a n t s , e v e n t h o u g h they a c c o u n t e d f o r o n l y 7 p e r c e n t of the l a b o r f o r c e ( I L O 1 9 9 1 c ; SIJ 1 9 9 0 b ) . B e n e f i t s a n d e n t i t l e m e n t c o n d i t i o n s f o r civil s e r v a n t s s h o u l d be s t a n d a r d i z e d to m a t c h t h e rest of t h o s e i n s u r e d u n d e r N I S to p r o v i d e m o r e r e s o u r c e s f o r the m e a g e r N I S b e n e f i t s . I n i t i a l l y , N I S c o n t r i b u t i o n s w e r e of t w o t y p e s : a f l a t rate ( f o r t h o s e e a r n i n g b e l o w J $ 1 2 w e e k l y ) a n d an a d d i t i o n a l w a g e - r e l a t e d r a t e ( f o r t h o s e e a r n i n g f r o m J $ 1 2 to J $ 1 5 0 w e e k l y ) . T h e N I S flat c o n t r i b u t i o n rates w e r e not i n c r e a s e d f o r 2 4 y e a r s ( f r o m the i n c e p t i o n of the s c h e m e in 1966 until 1990), a n d a l t h o u g h the c o n t r i b u t i o n c e i l i n g w a s r a i s e d , it w a s still v e r y low. In the m e a n t i m e the cost of living j u m p e d by 1 , 3 0 0 p e r c e n t , w h i c h l a r g e l y e x p l a i n s the l o w level of N I S b e n e f i t s . In 1 9 9 0 c o n t r i b u t i o n s w e r e m o d i f i e d as f o l l o w s : ( 1 ) the rate f o r m o s t s a l a r i e d e m p l o y e e s w a s s t a n d a r d i z e d to 2.5 p e r c e n t f o r e m p l o y e r s a n d 2 . 5 p e r c e n t f o r e m p l o y e e s ; (2) the flat rates f o r s a l a r i e d e m p l o y e e s in d o m e s t i c s e r v i c e a n d t h e a r m e d f o r c e s w e r e i n c r e a s e d a l m o s t s e v e n t i m e s ( n o w J $1 w e e k l y e a c h f o r the e m p l o y e r and the e m p l o y e e ) ; in a d d i t i o n , the s a m e p e r c e n t a g e r a t e s n o t e d in ( 1 ) w e r e a p p l i e d to e a r n i n g s b e t w e e n J $ 1 2 a n d J $ 2 9 0 w e e k l y ; (3) the flat rate f o r the s e l f - e m p l o y e d and v o l u n t a r i l y i n s u r e d w a s set at J $ 2 w e e k l y p l u s 5 p e r c e n t of e a r n i n g s b e t w e e n J $ 1 2 a n d J $ 2 9 0 w e e k l y ; and (4) the w a g e ceiling w a s increased a l m o s t t w o - f o l d f r o m

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J $ 7 , 8 0 0 to J $ 1 5 , 0 8 0 y e a r l y . T h e s e m e a s u r e s s h o u l d h a v e raised the c o n t r i b u t i o n r e v e n u e c o n s i d e r a b l y in 1991 ( M L W S 1990a, 1990b, 1990c). N I S a d m i n i s t r a t i v e e x p e n d i t u r e s as a p e r c e n t a g e of total e x p e n d i t u r e s d e c l i n e d f r o m 3 8 p e r c e n t to 10 p e r c e n t f r o m 1 9 7 8 - 1 9 9 0 . If the n e w n e s s of t h e N I S s c h e m e is t a k e n into a c c o u n t t h i s p r o p o r t i o n a p p e a r s to b e l o w . H o w e v e r , the N I S d o e s not p r o v i d e s i c k n e s s / m a t e r n i t y b e n e f i t s , its c o n t r i b u t i o n s are c o l l e c t e d by the g o v e r n m e n t , a n d its p e n s i o n s are paid by the post o f f i c e s . A d m i n i s t r a t i v e e x p e n s e s a r e not d i s a g g r e g a t e d , so it is imp o s s i b l e to d e t e r m i n e w h i c h a r e t h e key i t e m s . T h e n u m b e r of N I S e m p l o y e e s p e r 1 , 0 0 0 i n s u r e d ( w i t h a d j u s t e d r e g i s t r a t i o n f i g u r e s ) w a s 0 . 4 in 1 9 8 5 , or 0 . 6 b a s e d on a c t i v e c o n t r i b u t o r s ; b o t h r a t i o s are p r o b a b l y the l o w e s t in L A C . Not o n l y is the N I S s t a f f s m a l l , but it has a great n e e d to u p g r a d e its s k i l l s . T h e 1 9 9 0 - 1 9 9 4 p l a n p r o p o s e s to e x p a n d and train N I S p e r s o n n e l . T h e m a j o r a d m i n i s t r a t i v e p r o b l e m s f a c e d by the N I S are a high level of e v a s i o n a n d n o n c o m p l i a n c e , a p o o r r e c o r d of m a k i n g f i n a n c i a l r e p o r t s a n d d i s s e m i n a t i n g i n f o r m a t i o n , a n d an e x c e s s i v e l y l e n g t h y a n d c o m p l i c a t e d p r o c e s s i n g of b e n e f i t s . In 1986, out of 9 9 , 0 0 0 potential p e n s i o n e r s o n l y 4 8 , 0 0 0 c l a i m e d b e n e f i t s , a l l e g e d l y b e c a u s e of a lack of inf o r m a t i o n , c u m b e r s o m e p r o c e d u r e s , a n d the low level of b e n e f i t s . P o s t o f f i c e s are u n a b l e to pay p e n s i o n s p r o m p t l y : they o f t e n run out of c a s h , and p e n s i o n e r s u s u a l l y h a v e to stay in line f o r h o u r s to collect their p e n s i o n s . C o m p u t e r i z a t i o n is e x p e c t e d to h e l p s i m p l i f y a n d e x p e d i t e b e n e f i t p r o c e s s i n g , a n d t h e r e is a plan to r e p l a c e post o f f i c e s with w o r k e r s ' s a v i n g s and loan b a n k s , w h e r e t h e i n s u r e d c o u l d a l s o o p e n s a v i n g s a c c o u n t s ( M e s a - L a g o 1987a; PIJ 1 9 8 8 - 1 9 9 1 ; M L W S 1990a). I n v e s t m e n t r e t u r n s g e n e r a t e d a s h a r e of N I S r e v e n u e that i n c r e a s e d f r o m 2 9 p e r c e n t to 5 3 p e r c e n t f r o m 1 9 7 7 - 1 9 9 0 . H o w e v e r , the a n n u a l real i n v e s t m e n t y i e l d f r o m 1 9 7 9 - 1 9 9 0 w a s p o s i t i v e only in three years a n d ave r a g e d - 7 . 3 p e r c e n t , s o the real r e s e r v e s d e c l i n e d by 7 p e r c e n t in the s a m e p e r i o d . R e a s o n s f o r the n e g a t i v e y i e l d w e r e a high rate of inflation (an annual a v e r a g e of 17 p e r c e n t ) ; c o n c e n t r a t i o n of i n v e s t m e n t in g o v e r n m e n t s t o c k s ( 9 9 p e r c e n t of t h e p o r t f o l i o in 1 9 8 5 ) that p a i d a l o w e r y i e l d t h a n c o m m e r c i a l b a n k s ; and c o n t r o l of i n v e s t m e n t by the M i n i s t r y of F i n a n c e , w h i c h , at least f r o m 1 9 8 3 - 1 9 8 7 , r e t a i n e d a c c r u e d interest and did not invest s i g n i f i c a n t s u m s . S i n c e 1 9 8 8 s o m e m e a s u r e s have b e e n taken to c o r rect that s i t u a t i o n . T h e p o r t f o l i o h a s b e e n d i v e r s i f i e d , a n d in 1 9 9 0 the prop o r t i o n in g o v e r n m e n t s t o c k s h a d d e c l i n e d to 6 3 . 2 p e r c e n t ; t h e rest w a s i n v e s t e d in l o a n s ( 1 5 . 4 p e r c e n t ) , t r e a s u r y bills ( 1 0 . 4 p e r c e n t ) , c e r t i f i c a t e s of d e p o s i t ( 4 . 6 p e r c e n t ) , a n d s t o c k m a r k e t s h a r e s (3 p e r c e n t ) . A i d e d b y a d e c l i n e in i n f l a t i o n , in 1 9 8 7 a n d 1 9 8 8 the yield b e c a m e p o s i t i v e ( a b o u t 6 p e r c e n t ) , b u t a s h a r p i n c r e a s e in i n f l a t i o n in 1 9 8 9 and 1 9 9 0 t u r n e d t h e y i e l d n e g a t i v e a g a i n ( - 6 p e r c e n t ) . In 1 9 9 0 an I n v e s t m e n t O f f i c e w a s e s t a b l i s h e d at the M L W S to w o r k in c l o s e c o o p e r a t i o n w i t h the N I S to imp r o v e i n v e s t m e n t p e r f o r m a n c e a n d f u r t h e r d i v e r s i f y the p o r t f o l i o . If i n f l a tion is a b a t e d , the n e w p o l i c y m a y p r o v e to b e e f f e c t i v e .

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It is i m p o s s i b l e t o a s s e s s t h e a c t u a r i a l s t a b i l i t y of t h e N I S p e n s i o n f u n d b e c a u s e there has not been a t h o r o u g h actuarial e v a l u a t i o n

since

1 9 7 7 . A l t h o u g h l e g a l l y s u c h an e v a l u a t i o n h a s to b e d o n e e v e r y f i v e y e a r s , t h e 1 9 8 1 / 8 2 a n d 1 9 8 6 / 8 7 r e v i e w s w e r e p o s t p o n e d b e c a u s e of i n a d e q u a t e d a t a o n t h e i n s u r e d a n d on f i n a n c e s . A n i n t e r i m a c t u a r i a l r e p o r t d o n e b y a c o n s u l t i n g f i r m in 1 9 8 5 a d v i s e d t h a t in o r d e r to a u g m e n t b e n e f i t s it w a s n e c e s s a r y to i n c r e a s e t h e c o n t r i b u t i o n s ( b e n e f i t s w e r e r a i s e d in

1987—

m o r e than a d v i s e d by the a c t u a r y — a n d 1990, but c o n t r i b u t i o n s w e r e not raised until 1990). T h e interim report a r g u e d that the i n v e s t m e n t yield had t o b e i n c r e a s e d d r a m a t i c a l l y t o c o m p e n s a t e f o r t h e i n c r e a s e in b e n e f i t s , but s u c h an increase has not o c c u r r e d . I h a v e n o t e d that the

1990-1994

p l a n r e c o m m e n d s t h e c r e a t i o n of n e w p r o g r a m s , a n e x p a n s i o n of b e n e f i t s , a n d a l i b e r a l i z a t i o n of e n t i t l e m e n t c o n d i t i o n s w i t h o u t p r o v i d i n g t h e n e c e s s a r y i n c r e a s e in r e v e n u e , a n d that a 1 9 9 0 a c t u a r i a l r e p o r t a d v i s e d a g a i n s t s u c h a n e x p a n s i o n . S o f a r n o n e of t h e p r o p o s e d m o d i f i c a t i o n s h a s b e e n i m p l e m e n t e d . T h e N I S g e n e r a t e d a f i n a n c i a l s u r p l u s in e a c h y e a r of t h e 1 9 7 9 - 1 9 9 0 p e r i o d , b u t as a p e r c e n t a g e of r e v e n u e t h e s u r p l u s d e c l i n e d f r o m 8 0 p e r c e n t to 4 7 p e r c e n t , a n d in r e a l t e r m s t h e s u r p l u s w a s h a l v e d in t h e s a m e p e r i o d ; t h e real r e s e r v e s d e c l i n e d b y 7 p e r c e n t in that p e r i o d . T h e c u r r e n t f i v e - y e a r plan e x p e c t s that the c o m p u t e r i z a t i o n p r o c e s s will gene r a t e t h e n e e d e d d a t a to c o n d u c t r e g u l a r a c t u a r i a l e v a l u a t i o n s ( M e s a - L a g o 1 9 8 7 a , u p d a t e d w i t h P1J 1 9 8 8 - 1 9 9 0 ; C o k e 1 9 9 0 ; PIJ 1 9 9 0 a ) .

Public

Assistance

T h e P A P a d m i n i s t e r s six p r o g r a m s for the d i s p o s s e s s e d : (1) o l d - a g e disability p e n s i o n s for about 3 0 , 0 0 0 w h o d o not q u a l i f y for N I S p e n s i o n s and g r a n t s and w h o pass a m e a n s test; (2) f o o d s t a m p s for the poor, elderly, pregnant and lactating w o m e n , and children under five, helping 354,000 p e o p l e ; ( 3 ) o u t d o o r a i d to 1 8 , 0 0 0 t o t a l l y d e s t i t u t e a n d 1 , 6 1 3 e l d e r l y p e o p l e in i n f i r m a r i e s ; ( 4 ) a i d t o t h e d i s p o s s e s s e d a g e d t h a t c o n s i s t s of m e a l s , clothing, occupational therapy, and transportation; (5) retraining for the d i s a b l e d to e n a b l e t h e m to g e t j o b s ; ( 6 ) f i n a n c i a l a i d , s h e l t e r s , b e d s , c l o t h ing, and furniture for more than 2,000 affected by natural disasters; and ( 7 ) in 1 9 8 8 a n e m p l o y m e n t a n t i p o v e r t y p r o g r a m t o p r o v i d e j o b s a n d inc o m e t o 1 2 , 6 0 0 r u r a l p o o r . In 1 9 8 5 all t h e s e p r o g r a m s h e l p e d a b o u t half a m i l l i o n p e o p l e , o r a b o u t 2 0 p e r c e n t of t h e t o t a l p o p u l a t i o n . T h e P A P h a s c o m p l e m e n t e d the N I S and h e l p e d m o v e J a m a i c a t o w a r d a universal syst e m of s o c i a l s e c u r i t y . F u r t h e r m o r e , t h e s e p a r a t i o n of t h e s e t w o p r o g r a m s ( a n d t h e w i d e g a p in b e n e f i t s b e t w e e n t h e m ) h a s a l l o w e d s o m e o f t h e p r o b l e m s f a c e d in t h e B a h a m a s a n d B a r b a d o s to b e a v o i d e d . Still, t h e P A P is a f f l i c t e d b y s e v e r a l p r o b l e m s : ( 1 ) its b u d g e t is i n s u f f i c i e n t a n d is o f t e n d e p l e t e d b y m i d - y e a r , a n d t h e q u a l i t y of its s e r v i c e s h a s d e t e r i o r a t e d ; ( 2 ) t h e l e v e l of t h e a s s i s t a n c e p e n s i o n in 1 9 8 5 w a s o n l y U . S . $ 4 . 2 0 m o n t h l y , a n d a l t h o u g h it i n c r e a s e d t o a b o u t U . S . $ 6 . 5 0 in 1 9 9 0 it w a s still g r o s s l y

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i n s u f f i c i e n t ; ( 3 ) a c o n s i d e r a b l e n u m b e r of b e n e f i c i a r i e s of the f o o d s t a m p p r o g r a m r e c e i v e m u l t i p l e b e n e f i t s o r are not r e a l l y in n e e d , t h o u g h p e r i o d i c r e v i s i o n s h a v e cut their n u m b e r s c o n s i d e r a b l y (e.g., f r o m 3 6 6 , 4 8 0 to 2 9 1 , 8 8 3 f r o m 1 9 8 7 - 1 9 8 8 a n d f r o m 4 3 8 , 7 7 8 to 2 0 7 , 5 1 7 f r o m 1 9 8 9 - 1 9 9 0 ) ; ( 4 ) the s t a m p s h a v e l o w p u r c h a s i n g p o w e r , t h e y are o f t e n d e l i v e r e d late, a n d t h e i r m i x of f o o d i t e m s is i n f l e x i b l e ( M e s a - L a g o 1 9 8 7 a ; PIJ 1988-1991; M L W S 1990a). T h e 1 9 9 0 - 1 9 9 4 p l a n h a s p r o p o s e d s e v e r a l m e a s u r e s to c o p e w i t h s o m e of the p r o b l e m s e x p l a i n e d a b o v e : ( 1 ) an a n n u a l r e v i e w of p u b l i c ass i s t a n c e c a s e s to v e r i f y n e e d s as well as to r e v i e w a n d s t a n d a r d i z e t h e eli g i b i l i t y c r i t e r i a in o r d e r to p l u g l o o p h o l e s , e l i m i n a t e m u l t i p l e b e n e f i t s , and i n c r e a s e the level of s u p p o r t to t h o s e really in n e e d ; (2) a l i m i t a t i o n of f o o d s t a m p s to o n l y c h i l d r e n u n d e r f i v e a n d p r e g n a n t / l a c t a t i n g m o t h e r s ; t h o s e in n e e d w h o are e x c l u d e d f r o m this p r o g r a m will r e c e i v e small loans to d e v e l o p b u s i n e s s e s of their o w n ; ( 3 ) d e l i v e r y of f o o d s t a m p s by mail a n d i n c r e a s e d f l e x i b i l i t y in the mix of f o o d items; (4) a g r a d u a l i n c r e a s e in t h e real b e n e f i t l e v e l ; a n d ( 5 ) c o m p u t e r i z a t i o n of t h e p r o g r a m to h e l p e l i m i n a t e f r a u d a n d e x p e d i t e t h e d e l i v e r y of s t a m p s a n d the o v e r a l l p r o c e s s i n g of b e n e f i t s ( M L W S 1 9 9 0 a ; PIJ 1 9 9 0 a ) .

Public

Health

L e g a l l y the e n t i r e p o p u l a t i o n s h o u l d be c o v e r e d by the p u b l i c health s y s t e m , but s i n c e the m i d - 1 9 7 0 s the s y s t e m has d e t e r i o r a t e d — a s i t u a t i o n agg r a v a t e d by t h e e c o n o m i c c r i s i s of t h e 1 9 8 0 s . All t h e d i s p o s s e s s e d h a v e f r e e a c c e s s to t h e s y s t e m ( i n c l u d i n g d r u g s ) , c o n d i t i o n e d to a m e a n s test a d m i n i s t e r e d by the P A P f o o d s t a m p p r o g r a m . P H C , tests f o r d i a g n o s i n g c o m m u n i c a b l e d i s e a s e s , and p r e n a t a l c a r e are p r o v i d e d f r e e to the e n t i r e p o p u l a t i o n . U s e r f e e s are c h a r g e d f o r s e c o n d a r y and tertiary levels of care, a l t h o u g h the c h a r g e s a r e q u i t e l o w . P u b l i c h o s p i t a l s h a v e p r i v a t e w a r d s or p r i v a t e b e d s that c h a r g e h i g h e r f e e s . A b o u t 9 5 p e r c e n t of the total n u m b e r of hospital b e d s are in the p u b l i c s e c t o r , as are 5 0 p e r c e n t of the physic i a n s . An i n c r e a s i n g n u m b e r of p e o p l e use p r i v a t e f a c i l i t i e s , p a r t i c u l a r l y hospital services. T h e n u m b e r s of p h y s i c i a n s p e r 1 0 , 0 0 0 i n h a b i t a n t s a n d h o s p i t a l b e d s p e r 1 , 0 0 0 d e c r e a s e d by 5 0 p e r c e n t f r o m 1 9 7 0 - 1 9 8 8 : f r o m 3 . 8 to 1.6 a n d f r o m 4.1 to 2 . 2 , r e s p e c t i v e l y . B u t h o s p i t a l o c c u p a n c y i n c r e a s e d f r o m 5 3 p e r c e n t to 7 9 p e r c e n t in that p e r i o d ( t h o u g h it d e c l i n e d a g a i n to 67 p e r c e n t in 1 9 9 0 ) , a n d t h e a v e r a g e n u m b e r of d a y s of s t a y fell f r o m 11 to 7 . 6 . In t h e s a m e p e r i o d t h e i n f a n t m o r t a l i t y r a t e d e c r e a s e d f r o m 3 2 . 2 to 2 7 p e r t h o u s a n d , a n d l i f e e x p e c t a n c y at b i r t h r o s e f r o m 6 8 . 5 to 7 1 . H o w e v e r , a s l o w d o w n in t h e i m p r o v e m e n t of t h e s e i n d i c a t o r s has b e e n c l e a r s i n c e the s e c o n d half of t h e 1 9 7 0 s . T h e p r o p o r t i o n of p r e g n a n t w o m e n w h o rec e i v e d p r e n a t a l c a r e i n c r e a s e d f r o m 8 3 p e r c e n t to 8 8 . 8 p e r c e n t f r o m

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1984—1987 b u t d e c l i n e d to 6 7 . 8 p e r c e n t in 1 9 9 0 . C o n v e r s e l y , t h e r e w e r e s t e a d y i n c r e a s e s f r o m 1 9 8 4 - 1 9 9 0 in t h e p r o p o r t i o n s of m o t h e r s w h o r e c e i v e d p o s t n a t a l c a r e ( f r o m 5 3 p e r c e n t to 6 7 . 8 p e r c e n t ) ; i n f a n t s w h o rec e i v e d c a r e ( 4 7 p e r c e n t to 6 9 . 8 p e r c e n t ) ; a n d c h i l d r e n y o u n g e r t h a n o n e w h o w e r e i m m u n i z e d — e . g . , f o r D P T f r o m 5 6 . 9 p e r c e n t to 8 5 . 7 p e r c e n t , f o r p o l i o 5 5 . 7 p e r c e n t to 8 6 p e r c e n t , a n d f o r m e a s l e s 16.1 p e r c e n t to 6 4 . 8 p e r c e n t . In s p i t e of t h e s e e f f o r t s e p i d e m i c s of m e a s l e s , t y p h o i d , a n d d e n g u e s i g n i f i c a n t l y i n c r e a s e d the i n c i d e n c e of t h e s e d i s e a s e s . D i a r r h e a l d i s e a s e s a n d m a l n u t r i t i o n a r e l e a d i n g c a u s e s of d e a t h in c h i l d r e n u n d e r f i v e : in 1 9 8 5 o n l y 5 9 p e r c e n t of c h i l d r e n b e l o w 6 0 m o n t h s w e r e of n o r m a l n u t r i t i o n a l s t a t u s (PIJ 1 9 8 7 - 1 9 9 0 ; SIJ 1 9 9 0 a , 1 9 9 0 b ; P A H O 1 9 9 0 ) . S i n c e the m i d - 1 9 7 0 s t h e p u b l i c h e a l t h s e c t o r h a s b e e n a f f l i c t e d by s e v e r a l p r o b l e m s that e x p l a i n its m i x e d p e r f o r m a n c e . T h e p e r - c a p i t a ann u a l h e a l t h e x p e n d i t u r e in c o n s t a n t p r i c e s d e c l i n e d f r o m J $ 7 5 . 0 6 to J $ 4 6 . 5 0 f r o m 1 9 8 2 - 1 9 8 8 , a n d p u b l i c h e a l t h e x p e n d i t u r e s as a p r o p o r t i o n of total h e a l t h e x p e n d i t u r e s d e c r e a s e d f r o m 6 8 p e r c e n t to 5 5 p e r c e n t f r o m 1 9 8 2 - 1 9 8 6 ( w h e r e a s t h e s h a r e of p r i v a t e e x p e n d i t u r e s r o s e f r o m 3 2 percent to 4 5 p e r c e n t ) . A s c a r c i t y of p e r s o n n e l has b e c o m e a m a j o r p r o b l e m ; the p e r c e n t a g e s of u n f i l l e d v a c a n c i e s f o r n u r s e s , p h a r m a c i s t s , a n d d o c t o r s m a y be as h i g h as 5 0 p e r c e n t . S a l a r i e s l a g g i n g b e h i n d t h e c o s t of l i v i n g h a v e r e s u l t e d in a m a s s i v e e m i g r a t i o n of m e d i c a l p e r s o n n e l . T h e p h y s i c a l p l a n t a n d e q u i p m e n t h a v e g r a d u a l l y d e t e r i o r a t e d b e c a u s e of a lack of m a i n t e n a n c e a n d r e p l a c e m e n t ; h e a l t h c e n t e r s a r e u n d e r u t i l i z e d ( u s e of their o u t p a t i e n t s e r v i c e s d e c l i n e d 2 3 p e r c e n t f r o m 1 9 8 4 - 1 9 8 6 ) b e c a u s e of a lack of d o c t o r s and p h y s i c i a n s and a p o o r s u p p l y of d r u g s ; a n d t h e r e is a l o n g w a i t i n g t i m e f o r i n p a t i e n t c a r e . W i d e d e v a s t a t i o n c a u s e d by H u r r i c a n e G i l b e r t a g g r a v a t e d m a n y of t h e s e p r o b l e m s . T h e d e t e r i o r a t i o n of the p u b l i c h e a l t h s y s t e m has f o r c e d the p o o r to use p r i v a t e s e r v i c e s . A s u r v e y c o n d u c t e d in t h e late 1 9 8 0 s s h o w e d that 4 2 p e r c e n t of t h e p o o r e s t t w o f i f t h s of t h e p o p u l a t i o n u s e d p r i v a t e c a r e , but o n l y 1.2 p e r c e n t of that g r o u p had h e a l t h i n s u r a n c e ( A b e l - S m i t h a n d C r e e s e 1 9 8 8 ; G o v e r n m e n t of J a m a i c a 1988; SIJ 1989; PIJ 1 9 8 8 - 1 9 9 1 ) . E x t e r n a l aid h a s p r o v i d e d s o m e r e l i e f , f o r i n s t a n c e , a n e w c e n t r a l p u b lic health l a b o r a t o r y built w i t h E u r o p e a n E c o n o m i c C o m m u n i t y ( E E C ) aid a n d the r e s t o r a t i o n a n d r e - e q u i p m e n t of h e a l t h - c a r e f a c i l i t i e s w i t h U S A I D and I D B help. T a r g e t i n g the poor and the m o t h e r / i n f a n t g r o u p has been a n o t h e r p o s i t i v e s t e p , b u t the f u n d a m e n t a l f l a w s of the s y s t e m c a n n o t b e corrected with these policies. Four m a j o r alternatives have been explored: c o m p u l s o r y h e a l t h i n s u r a n c e , user f e e s , e x t e n s i o n of v o l u n t a r y p r i v a t e ins u r a n c e , a n d p r i v a t i z a t i o n of s e r v i c e s . T h e c r e a t i o n of a s i c k n e s s / m a t e r n i t y p r o g r a m w i t h i n t h e N I S w a s r e c o m m e n d e d by s o m e t e c h n i c a l r e p o r t s , b u t in 1 9 8 8 t h e g o v e r n m e n t r e j e c t e d t h e p r o p o s a l b e c a u s e it c o n s i d e r e d t h e idea of i n c r e a s i n g payroll c o n t r i b u t i o n s to b e u n a c c e p t a b l e . S o m e s e c t o r s of t h e p o p u l a t i o n a l s o felt that the N I S s h o u l d i m p r o v e its c u r r e n t b e n e f i t s

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b e f o r e a d d i n g n e w p r o g r a m s . T h e c u r r e n t 1 9 9 0 - 1 9 9 4 plan d o e s not c o n t e m p l a t e c o m p u l s o r y health i n s u r a n c e . U s e r f e e s f o r h o s p i t a l s e r v i c e s w e r e f r o z e n f r o m 1 9 6 8 - 1 9 8 4 a n d then i n c r e a s e d s o m e w h a t , but they still r e m a i n v e r y low; the p o o r (as c e r t i f i e d by the P A P ) are e x e m p t e d f r o m p a y i n g the f e e s . In 1 9 8 6 the h o s p i t a l s that c o l l e c t the f e e s w e r e a l l o w e d to r e t a i n 5 0 p e r c e n t of the r e v e n u e (to i m p r o v e s e r v i c e s ) , a n d that p r o p o r t i o n w a s i n c r e a s e d to 75 p e r c e n t in 1990. T h e 1 9 9 0 - 1 9 9 4 plan r e c o m m e n d s that the a m o u n t of the f e e s a p p r o x i m a t e the real cost of p r o v i d i n g t h e s e r v i c e s . V o l u n t a r y i n s u r a n c e w i t h an i n d e m n i t y t y p e of p o l i c y (e.g., B C / B S ) has r a p i d l y e x p a n d e d in J a m a i c a , b u t it h a s s o m e d i s a d v a n t a g e s : it e x c l u d e s h i g h - r i s k g r o u p s a n d m a j o r m e d i c a l risks, a n d it r e q u i r e s s u b s t a n tial c o p a y m e n t s that m a k e the s e r v i c e s u n a f f o r d a b l e by the l o w - i n c o m e ins u r e d . H M O m o d e l s c a n p r o v i d e f u l l e r c o v e r a g e at l o w e r c o s t s , b u t t h e c o p a y m e n t s still a r e h i g h f o r t h e l o w e s t i n c o m e g r o u p s ( i n c l u d i n g m o s t of the s e l f - e m p l o y e d ) . S i c k f u n d s or f r i e n d l y society c o n t r a c t s , of the t y p e o p e r a t e d in E u r o p e or s o m e Latin A m e r i c a n c o u n t r i e s p r i o r to the introd u c t i o n of c o m p u l s o r y i n s u r a n c e , c o u l d p r o v i d e b a s i c c o v e r a g e ( w i t h ref e r r a l s to p u b l i c h o s p i t a l s ) a n d d o s o r a p i d l y a n d at l o w e r c o s t s t h a n B C / B S and H M O s . F i n a l l y , there h a s b e e n an i n c r e a s i n g use of p r i v a t e s e r v i c e s to r e d u c e c o s t s a n d i m p r o v e t h e q u a l i t y of p u b l i c n o n m e d i c a l s e r v i c e s , but p l a n s f o r a f u l l p r i v a t i z a t i o n of m e d i c a l s e r v i c e s h a v e b e e n h a l t e d . Hospital d i v e s t i ture of n o n m e d i c a l s e r v i c e s b e g a n in 1 9 8 7 in t h r e e a r e a s : h o u s e k e e p i n g , j a n i t o r i a l , and p o r t e r i n g ; c a t e r i n g ; a n d l a u n d r y . T h e first g r o u p of s e r v i c e s w a s c o n t r a c t e d o u t in 1 9 8 7 w i t h t h e p r i v a t e s e c t o r , t h r o u g h f o r m a l b i d d i n g , f o r the three p u b l i c h o s p i t a l s in K i n g s t o n . T h e r e s u l t s have b e e n p o s itive: c o s t s h a v e b e e n cut in half, q u a l i t y has i m p r o v e d , a n d staff m o r a l e has r i s e n . C a t e r i n g a n d l a u n d r y s e r v i c e s f o r the s a m e h o s p i t a l s b e g a n in 1988; in a d d i t i o n , t h e r e w a s a plan to c o n t r a c t out h o s p i t a l e q u i p m e n t serv i c e s . T h e M H o v e r s e e s and e v a l u a t e s c o n t r a c t e d s e r v i c e s . A c c o r d i n g to a h i g h - l e v e l M H o f f i c i a l , at t h e e n d of 1 9 9 1 t h e p r i v a t i z a t i o n of n o n m e d ical s e r v i c e s w a s n o t yet c o m p l e t e but w a s p r o g r e s s i n g . T h e 1 9 9 0 - 1 9 9 4 plan r e c o m m e n d e d t h e p a r t i c i p a t i o n of p r i v a t e p r a c t i t i o n e r s f o r p r o v i d i n g s e r v i c e s at p u b l i c f a c i l i t i e s (to e a s e t h e p e r s o n n e l s h o r t a g e ) , and b y t h e e n d of 1991 m o r e t h a n o n e - f o u r t h of the d o c t o r s in the p u b l i c s e c t o r w e r e p r i v a t e p r a c t i t i o n e r s . P r i v a t i z a t i o n of m e d i c a l s e r v i c e s , m a i n l y in t e r m s of h o s p i t a l s but also f o r s e l e c t e d p r e v e n t i v e a n d c u r a t i v e s e r v i c e s , w a s s c h e d uled to start in 1 9 8 9 . T h r e e m o d e l s w e r e g o i n g to b e t e s t e d : (1) o n e hospital f u l l y o p e r a t e d by a p r i v a t e c o n t r a c t o r d u r i n g a f i v e - y e a r p e r i o d w i t h an o p t i o n f o r e x t e n s i o n ; ( 2 ) o n e h o s p i t a l m a n a g e d b y a p r i v a t e g r o u p f o r a t h r e e - y e a r r e n e w a b l e c o n t r a c t , w i t h t h e M H a s s u m i n g t h e f i n a n c i a l risk; and (3) one hospital m a n a g e d and controlled by a private corporation, w i t h t h e g o v e r n m e n t h o l d i n g t h e m a j o r i t y of s h a r e s . T h e c h a n g e in

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administration in 1989 halted the p r i v a t i z a t i o n of medical services, and by the end of 1991 the situation r e m a i n e d u n c h a n g e d ( A b e l - S m i t h and C r e e s e 1988; L e w i s 1988; SU 1990a; M L W S 1990a).

Chile: Pioneer and Model of Privatization General Characteristics

of the

Reform

T o g e t h e r with U r u g u a y , Chile is a p i o n e e r in the introduction of social ins u r a n c e in L A C . At the b e g i n n i n g of the 1 9 7 0 s the C h i l e a n social s e c u rity s y s t e m w a s o n e of the t w o most a d v a n c e d in the W e s t e r n h e m i s p h e r e : it c o v e r e d all c o n t i n g e n c i e s , r e a c h e d v i r t u a l l y the e n t i r e p o p u l a t i o n ( t h r o u g h the c o m b i n a t i o n of c o n t r i b u t o r y a n d n o n c o n t r i b u t o r y s c h e m e s ) , and o f f e r e d g e n e r o u s b e n e f i t s . But it w a s e x t r e m e l y f r a g m e n t e d a n d legally c o m p l e x and stratified (it c o m p r i s e d 100 i n d e p e n d e n t pension prog r a m s p l u s m a n y o t h e r s c o v e r i n g d i f f e r e n t c o n t i n g e n c i e s ) ; it a l s o lacked e f f e c t i v e c o o r d i n a t i o n , a l l o w e d u n j u s t i f i e d p r i v i l e g e s a n d s i g n i f i c a n t ine q u a l i t i e s , c o n s t i t u t e d a heavy e c o n o m i c b u r d e n (the p a y r o l l tax w a s 6 5 percent, and in 1971 total e x p e n d i t u r e s r e a c h e d the historical c o n t i n e n t a l record of 17 p e r c e n t of G D P ) , s u f f e r e d f i n a n c i a l and actuarial d i s e q u i l i b r i u m , a n d r e q u i r e d s u b s t a n t i a l state s u b s i d i e s ( 2 9 p e r c e n t of total social security r e v e n u e s ) . Interest g r o u p s b l o c k e d the urgently n e e d e d s y s t e m ref o r m s r e c o m m e n d e d under s u c c e s s i v e a d m i n i s t r a t i o n s ( M e s a - L a g o 1978, 1989c; P i n e r a 1991; C h e y r e V a l e n z u e l a 1991; Iglesias and Acuiia 1991; S a n t a m a r i a 1992). In 1973 the long Chilean d e m o c r a t i c tradition w a s interrupted, and the new authoritarian r e g i m e destabilized or b a n n e d trade unions, p r o f e s s i o n a l a s s o c i a t i o n s , and political parties. T h e w e a k e n i n g of the p r e s s u r e g r o u p s and e m p o w e r i n g of the state, c o m b i n e d with social p r e s s u r e , c o n t r i b u t e d to the r e f o r m of social security. Legislation e n a c t e d in 1 9 7 9 eliminated the most blatant inequalities, such as seniority p e n s i o n s and the perseguidora (a pension for h i g h - r a n k i n g civil s e r v a n t s that w a s c o n t i n u a l l y a d j u s t e d to equal the c u r r e n t salary of the post f o r m e r l y o c c u p i e d by the p r i v i l e g e d p e n s i o n e r ) , and s t a n d a r d i z e d s o m e e n t i t l e m e n t c o n d i t i o n s ; e.g., r e t i r e m e n t ages w e r e u n i f o r m l y set at 6 5 / 6 0 f o r m a l e s / f e m a l e s . A g r a d u a l p r o c e s s of u n i f y i n g the old s y s t e m took p l a c e in the 1 9 7 0 s a n d 1 9 8 0 s . P e n s i o n s c h e m e s w e r e d i v i d e d into three g r o u p s : (1) b l u e - c o l l a r , p r i v a t e w h i t e collar, and railroad workers; (2) municipal and race-track w o r k e r s ; and (3) m e r c h a n t - m a r i n e w o r k e r s . Civil s e r v a n t a n d b a n k i n g s c h e m e s r e m a i n e d i n d e p e n d e n t t e m p o r a r i l y , and the military and police s c h e m e s w e r e c o m pletely e x c l u d e d f r o m the r e f o r m . An institute of social i n s u r a n c e s t a n d a r d i z a t i o n ( I N P ) w a s a p p o i n t e d to m a n a g e the u n i f i e d s c h e m e s , d e v e l o p m e t h o d s to s t a n d a r d i z e t h e m , and a d m i n i s t e r a special f u n d ( f i n a n c e d by

116

C H A N G I N G S O C I A L SECURITY IN L A T I N A M E R I C A

the state) to c o v e r the g r o w i n g d e f i c i t . In 1988, 17 f u n d s m e r g e d in the INP, which incorporated the r e m a i n i n g civilian pension s c h e m e s by the end of the decade. The old superintendency of social security continues to supervise the old system and to collect and publish data on the entire social security system. A new pension scheme with uniform entitlement conditions and regulations was introduced in 1980 and began to operate in May 1981. Based on the "social m a r k e t " ideology, the new s c h e m e has the following characteristics: (1) it assigns to the state a subsidiary role in social security, entrusting the operation of the new s c h e m e to freely c o m p e t i n g private pension f u n d administrative corporations ( A F P s or sociedades anónimas) that are strictly regulated, s u p e r v i s e d , and audited by a new superintendency ( S A F P ) , and with a series of state g u a r a n t e e s ; (2) it establishes a compulsory saving/pension program (for old age, plus disability and survivors coverage through separate private insurance companies); (3) it is financed by the insured workers alone (the e m p l o y e r s continued paying some contributions for other contingencies until 1988, when the state became the only financier of all those programs except employment injury); (4) the insured's contributions are credited to individual accounts, and all funds are invested by the AFP in different instruments; investment returns are proportionally credited to the account of the insured, who is also entitled to open a voluntary savings account; and (5) at the time of retirement the insured can c h o o s e f r o m a m o n g various old-age pension options. There is a debate on whether the new s c h e m e is truly private. T w o ILO officials claim that the scheme does not really have a clear private-public dichotomy because it downplays the important role of the state in providing substantial subsidies and guarantees (Gillion and Bonilla 1992). T h o s e insured in the old pension s c h e m e were allowed to e x e r c i s e some of their acquired rights (e.g., seniority pensions) only during a transition period but to keep other rights permanently. In addition, they were given a f i v e - y e a r period (which expired in May 1986) to stay in the old scheme or m o v e into the new one. A strong incentive to move was a significant reduction in the insured's payroll contribution in the new system, c o m b i n e d with a publicity c a m p a i g n criticizing the f l a w s of the old scheme and exalting the virtues of the new o n e . By the end of 1982, 1.6 million insured (half the labor force and close to 70 percent of all the insured) had moved to the new scheme. Since 1983 all salaried new entrants in the labor f o r c e are obligated to join the new s c h e m e . T h e old s c h e m e is expected to last for about 4 0 - 5 0 years. In the f o l l o w i n g analysis I refer to the old and new pension s c h e m e s as public and private, respectively (Baeza and M a n u b e n s 1988; A r e l l a n o 1989; Ferrara 1989; M e s a - L a g o 1989c; Castro J i m é n e z 1990; Borzutzky 1991; Piñera 1991; Iglesias and Acuña 1992; C I E D E S S 1992).

117

CHANGING SOCIAL SECURITY: CASES OF R E F O R M

Population

Coverage

A c c o r d i n g t o the l a w all s a l a r i e d w o r k e r s , i n c l u d i n g a g r i c u l t u r a l w o r k e r s , d o m e s t i c servants, and e m p l o y e e s o f m i c r o e n t e r p r i s e s , are c o m p u l s o r i l y c o v e r e d in the p r i v a t e s c h e m e , w h e r e a s t h e s e l f - e m p l o y e d c a n j o i n v o l u n t a r i l y . T h o s e i n s u r e d w h o d o not m e e t t h e n e e d e d r e q u i r e m e n t s f o r a r e g u l a r p e n s i o n a r e e n t i t l e d to a m i n i m u m p e n s i o n w i t h s t a t e s u p p o r t . P e n s i o n e r s and their d e p e n d e n t

f a m i l i e s are e l i g i b l e for health care.

The

n o n i n s u r e d , i n c l u d i n g the u n e m p l o y e d , u n p a i d f a m i l y w o r k e r s , a n d t h e n o n c o v e r e d s e l f - e m p l o y e d , a r e e n t i t l e d to a p u b l i c a s s i s t a n c e p e n s i o n p a i d by t h e s t a t e . The

proportion

o f the

labor

force covered

by

the p u b l i c

scheme

s t e a d i l y i n c r e a s e d a n d p e a k e d at 7 6 p e r c e n t in 1 9 7 3 ; it d e c l i n e d to a b o u t 6 2 p e r c e n t in 1 9 8 0 . O n c e the t w o s c h e m e s w e r e c o m b i n e d ( b u t e x c l u d i n g the m i l i t a r y a n d the p o l i c e ) , c o v e r a g e c o n t i n u e d d e c r e a s i n g to a t r o u g h o f 5 7 p e r c e n t in 1 9 8 2 (in the m i d s t o f t h e e c o n o m i c c r i s i s ) a n d s t e a d i l y r o s e t h e r e a f t e r to 7 9 p e r c e n t in 1 9 8 8 a n d c l o s e to 8 6 p e r c e n t in 1 9 9 1 . ( T h e p e r c e n t a g e o f c o v e r a g e b a s e d o n t h e n u m b e r o f r e g i s t e r e d i n s u r e d is c o n s i d e r a b l y h i g h e r than that b a s e d on t h e n u m b e r o f c o n t r i b u t i n g

insured—see

the n e x t s u b s e c t i o n . ) R e a s o n s f o r t h e d e c l i n e in c o v e r a g e w e r e t h e s h a r p i n c r e a s e in u n e m p l o y m e n t , e x p a n s i o n o f the i n f o r m a l s e c t o r , a n d e v a s i o n , plus s t a t i s t i c a l c o r r e c t i o n s m a d e to t h e r e g i s t r y to e l i m i n a t e o r r e d u c e d o u b l e c o u n t i n g o f the i n s u r e d . T h e u p s w i n g in c o v e r a g e r e s u l t e d m o s t l y f r o m an e c o n o m i c r e c u p e r a t i o n a n d a d e c r e a s e in u n e m p l o y m e n t d u r i n g t h e s e c o n d h a l f o f the 1 9 8 0 s . In A u g u s t 1 9 9 1 , 9 0 p e r c e n t o f the i n s u r e d w e r e r e g i s t e r e d in the p r i v a t e s c h e m e ; the n u m b e r o f i n s u r e d in t h e p r i v a t e s c h e m e increased almost three-fold from

1 9 8 1 - 1 9 9 1 , w h e r e a s t h e n u m b e r o f in-

s u r e d in the p u b l i c s c h e m e d e c l i n e d b y m o r e than o n e - h a l f . A b o u t 6 0 p e r c e n t o f t h o s e in the p r i v a t e s c h e m e a r e b e l o w 3 5 y e a r s o f a g e , b u t the p u b l i c s c h e m e m o s t l y c o v e r s p e o p l e c l o s e to r e t i r e m e n t . In 1 9 8 7 a b o u t

97

p e r c e n t o f the p o p u l a t i o n a g e d 6 0 a n d o l d e r r e c e i v e d s o m e t y p e o f p u b l i c assistance

pension

(SAFP

1981-1992;

SSS

1982-1992;

Mesa-Lago

1987b, 1988a, 1989c; Cheyre Valenzuela 1 9 9 1 ; Iglesias and Acuña Arrau 1992; C I E D E S S

1991;

1992).

A l a b o r s u r v e y c o n d u c t e d in 1 9 8 8 s h o w e d that

1 9 . 5 p e r c e n t o f the

l a b o r f o r c e w a s not c o v e r e d b y s o c i a l s e c u r i t y , but that p e r c e n t a g e v a r i e d in d i f f e r e n t o c c u p a t i o n a l g r o u p s : 1 6 p e r c e n t a m o n g s a l a r i e d w o r k e r s ,

36

percent among domestic servants, 5 8 percent a m o n g e m p l o y e e s o f enterp r i s e s w i t h l e s s than f i v e w o r k e r s ( b u t o n l y 8 p e r c e n t in e n t e r p r i s e s w i t h m o r e t h a n 5 0 w o r k e r s ) , 71 p e r c e n t a m o n g t h e s e l f - e m p l o y e d , a n d 9 2 p e r c e n t a m o n g unpaid f a m i l y w o r k e r s . M o s t o f the n o n c o v e r e d

population

c o n s i s t s o f the s e l f - e m p l o y e d : the m a j o r i t y o f t h o s e i n s u r e d are p r o f e s s i o n als w i t h r e l a t i v e l y high i n c o m e s , b u t t h e b u l k o f t h e i n f o r m a l s e l f - e m p l o y e d

118

CHANGING SOCIAL SECURITY IN LATIN AMERICA

are not affiliated. In 1991 only 3 percent o f those registered w e r e s e l f - e m ployed, and it was estimated that two-thirds o f the registered s e l f - e m p l o y e d were not c o v e r e d . R e a s o n s g i v e n for such low c o v e r a g e are: ( 1 ) voluntary affiliation (the o f f i c i a l e x p l a n a t i o n for the lack o f mandatory c o v e r a g e is the d i f f i c u l t y in c o n t r o l l i n g it) c o m b i n e d with poor i n f o r m a t i o n

about

rights and poor foresight a m o n g these workers; ( 2 ) the low and unstable inc o m e o f this group; ( 3 ) the high p e r c e n t a g e o f contribution ( h o w e v e r , both the s e l f - e m p l o y e d ' s p e r c e n t a g e c o n t r i b u t i o n s and b e n e f i t s are equal to those for salaried w o r k e r s ) ; and ( 4 ) the d i s i n c e n t i v e for affiliation created by a v a i l a b l e , free, public a s s i s t a n c e a l t e r n a t i v e s , such as p e n s i o n s , health c a r e , and family subsidies. T o b e c o m e insured, the s e l f - e m p l o y e d have to j o i n all social security p r o g r a m s , and o n e - h a l f o f the c o n t r i b u t i o n (i.e., 10 percent o f earnings) g o e s to the o l d - a g e pension s c h e m e . S o m e s u g g e s t i o n s to increase protection o f this group are to allow c o v e r a g e for s i c k n e s s / m a ternity and disability/survivors to be separate from o l d - a g e pensions and to c r e a t e a special pension program tailored to the s e l f - e m p l o y e d ' s needs and c a p a c i t i e s to pay. T h e new d e m o c r a t i c g o v e r n m e n t has not t a c k l e d this p r o b l e m , although in

1991

it w a s c o n s i d e r i n g

a special program

for

2 5 0 , 0 0 0 l o w - p a i d s e a s o n a l w o r k e r s w h o pick and pack fruit e x p o r t s . Optional incorporation o f the military and p o l i c e into the new s y s t e m has also recently been suggested ( S A F P

1981-1992;

Mesa-Lago

1987b,

1988a,

1 9 8 9 c , 1 9 9 0 ; A r e l l a n o 1 9 8 9 ; M a r c e l and A r e n a s 1 9 9 1 ) .

Compliance T h e c r e a t o r s o f the private s c h e m e thought that it w o u l d r e d u c e e v a s i o n and p a y m e n t d e l a y s and thus i n c r e a s e the n u m b e r o f e f f e c t i v e c o n t r i b u tors. T h e rationale was that the w o r k e r s would register and pay their c o n tributions ( w h i c h w o u l d b e s a f e and g r o w into a s i z a b l e s u m ) and e m p l o y e r s w o u l d not have to pay c o n t r i b u t i o n s and s o w o u l d have i n c e n t i v e to underreport s a l a r i e s ( P i n e r a 1 9 9 1 ; C 1 E D E S S 1 9 9 2 ;

no

Santa-

maria 1 9 9 2 ) . But that hope has not m a t e r i a l i z e d b e c a u s e o f a lack o f adequate c o n t r o l s , a high c o n t r i b u t i o n for the insured, high inflation that c r e ated an i n c e n t i v e for e m p l o y e r s to delay the transfer o f salary d e d u c t i o n s , difficulties in incorporating the s e l f - e m p l o y e d , and c h e a p e r alternatives in public a s s i s t a n c e . T h e proportion o f those r e g i s t e r e d in the public s c h e m e w h o pay their contribution

increased

steadily

from

68

percent

to 8 6 p e r c e n t

from

1 9 8 0 - 1 9 8 7 , as they c a m e c l o s e r to the retirement a g e . C o n v e r s e l y , in the private s c h e m e the p r o p o r t i o n d e c r e a s e d f r o m a p e a k o f 7 6 p e r c e n t in 1 9 8 3 to 7 0 percent in 1 9 8 7 and further to 6 1 percent or 5 3 percent in 1 9 9 0 ( b a s e d on d i f f e r e n t c a l c u l a t i o n s ) and 5 2 p e r c e n t in 1 9 9 1 . T h i s p r i v a t e scheme behavior, which

is c o n t r a r y to what w a s e x p e c t e d g i v e n

the

e c o n o m i c c r i s i s and s u b s e q u e n t r e c u p e r a t i o n , might have b e e n c a u s e d by

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119

f l a w s in the S A F P d a t a on a f f i l i a t i o n (e.g., p e n s i o n e r s w h o r e m a i n regist e r e d as a c t i v e ) , by a c t u a l i n c r e a s e s in e v a s i o n a n d p a y m e n t d e l a y s (in 1991 the o b l i g a t i o n s of e m p l o y e r s w h o d e d u c t e d their w o r k e r s ' c o n t r i b u tions but did not t r a n s f e r t h e m to the s c h e m e a m o u n t e d to U . S . $ 2 0 0 million), or b y a c o m b i n a t i o n of b o t h . It a p p e a r s that t h o s e i n s u r e d w h o h a v e low i n c o m e s d e l a y p a y m e n t to r e d u c e c o n t r i b u t i o n s in o r d e r to get a m i n i m u m p e n s i o n . At the e n d of 1988, 5 6 p e r c e n t of the l a b o r f o r c e w a s r e g istered a n d c o n t r i b u t i n g , 2 4 p e r c e n t w a s r e g i s t e r e d a n d not c o n t r i b u t i n g , a n d c l o s e to 2 0 p e r c e n t w a s not c o v e r e d . A g o o d p o r t i o n of t h e n o n c o n t r i b u t o r s w e r e t e m p o r a r y w o r k e r s a n d u n e m p l o y e d , a n d o t h e r s had w i t h drawn f r o m the labor force. A m o n g the noncontributors, 50 percent had not p a i d f o r o n e y e a r or less and 3 4 p e r c e n t f o r m o r e t h a n o n e y e a r . T h e p r o p o r t i o n of c o n t r i b u t o r s a m o n g t h e r e g i s t e r e d s e l f - e m p l o y e d w a s 4 0 p e r c e n t in 1991, c o n s i d e r a b l y l o w e r t h a n t h e 5 3 p e r c e n t a m o n g s a l a r i e d w o r k e r s . W h e n t h e n u m b e r of c o n t r i b u t o r s i n s t e a d of t h e n u m b e r r e g i s t e r e d is u s e d , t h e p r o p o r t i o n of t h e l a b o r f o r c e c o v e r e d is c u t by a b o u t o n e - h a l f : in 1990, 7 9 p e r c e n t w e r e r e g i s t e r e d a n d 4 2 p e r c e n t w e r e c o n t r i b u t i n g , a n d in 1991 the p r o p o r t i o n s w e r e 8 6 p e r c e n t a n d 4 4 p e r c e n t , res p e c t i v e l y ( t h e s e f i g u r e s e x c l u d e c o n t r i b u t o r s in the p u b l i c s y s t e m ; w h e n t h e s e are a d d e d , c o v e r a g e i n c r e a s e d to 51 p e r c e n t in 1 9 9 1 — w i t h o u t the a r m e d f o r c e s ) . In a d d i t i o n , there is s i g n i f i c a n t u n d e r r e p o r t i n g of e a r n i n g s : the gap b e t w e e n insurable earnings and actual c o n t r i b u t i o n s e x p a n d e d f r o m 1 9 8 2 - 1 9 9 0 , r e a c h i n g a b o u t 2 0 p e r c e n t in 1990, w h e n o n e - f o u r t h of t h e c o n t r i b u t o r s p a i d b a s e d on e a r n i n g s e q u a l to or l o w e r t h a n t h e m i n i m u m w a g e , l a r g e l y b e c a u s e t h e y w e r e i n t e r e s t e d o n l y in t h e m i n i m u m p e n s i o n ( S A F P 1 9 8 1 - 1 9 9 2 ; S S S 1 9 8 2 - 1 9 9 2 ; I g l e s i a s a n d A c u ñ a 1991; Arrau 1992; C I E D E S S 1992). C o m p l i a n c e in the p r i v a t e s c h e m e c o u l d be i m p r o v e d by u s i n g a sing l e u n i v e r s a l i d e n t i f i c a t i o n f o r all f i n a n c i a l t r a n s a c t i o n s , u n i f y i n g the collection of c o n t r i b u t i o n s , p r o m p t l y c o r r e c t i n g t h e r e g i s t r y to a c c o u n t f o r l a b o r f o r c e w i t h d r a w a l s a n d p e n s i o n e r s , p r o m p t l y d e t e c t i n g late p a y e r s t h r o u g h c o m p u t e r i z e d r e c o r d s , i n c r e a s i n g the level of r e p o r t i n g by t h o s e i n s u r e d w h o s e e m p l o y e r s fail to t r a n s f e r c o n t r i b u t i o n s , a n d m o r e e f f e c tively p r o s e c u t i n g d e l i n q u e n t e m p l o y e r s . B u t s o m e of t h e s e m e a s u r e s are not easily i m p l e m e n t e d ; f o r i n s t a n c e , the i n s u r e d are e x p e c t e d to c h e c k the A F P ' s q u a r t e r l y r e p o r t s of their i n d i v i d u a l a c c o u n t s ( c a r i ó l a s ) r e g u l a r l y a n d d e t e c t if e m p l o y e r s a r e not t r a n s f e r r i n g their c o n t r i b u t i o n s , b u t m a n y d o n ' t d o so, a n d o t h e r s c a n n o t u n d e r s t a n d the r e p o r t . T h e A F P s can p r o s e c u t e d e l i n q u e n t e m p l o y e r s , but m a n y fail to d o s o b e c a u s e they f e a r that the e m p l o y e r will e n c o u r a g e his or her e m p l o y e e s to s h i f t to a n o t h e r A F P . T h e e m p l o y e r m u s t c o m p l e t e as m a n y m o n t h l y f o r m s as t h e s o c i a l s e c u rity i n s t i t u t i o n s that c o v e r the e m p l o y e e s ; h e n c e , l a r g e e n t e r p r i s e s h a v e to c o m p l e t e d o z e n s of f o r m s , but t h e p r o b l e m is e v e n w o r s e f o r m i d - s i z e d enterprises without computer facilities. A unified, fully computerized

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collection system with a single form for reporting would speed up paym e n t s , r e d u c e e m p l o y e r c o s t s , a n d s t r e n g t h e n c o n t r o l of e v a s i o n a n d p a y m e n t d e l a y s . Both at the b e g i n n i n g a n d t o w a r d the end of the 1980s t h e r e w e r e s e v e r a l p r o j e c t s to a c c o m p l i s h t h a t t a s k . But the S A F P a n d t h e largest A F P s o p p o s e d s u c h a c h a n g e f o r the f o l l o w i n g r e a s o n s : fear that a p o w e r f u l s t a t e a g e n c y c o u l d use i n f o r m a t i o n a g a i n s t the A F P s ; loss of the c o m p e t i t i v e e d g e that the l a r g e s t A F P s h a v e g a i n e d by h a v i n g a n a t i o n a l n e t w o r k of c o l l e c t i n g b r a n c h e s ; p o t e n t i a l d a m a g e s that the c o l l e c t i n g a g e n c y c o u l d incur via c o m p u t a t i o n a l e r r o r s a n d the r e s u l t i n g legal i s s u e s c o n c e r n i n g r e s p o n s i b i l i t y f o r s u c h e r r o r s ; o p p o s i t i o n to the i n v e s t m e n t of all c o l l e c t e d f u n d s by the a g e n c y ; a n d q u e s t i o n s on w h o (i.e., the A F P , t h e e m p l o y e r , or the s t a t e ) w o u l d pay f o r the c o l l e c t i n g a g e n c y . At the e n d of 1 9 8 8 a c o m p r e h e n s i v e p r o j e c t t a c k l e d m a n y of t h e s e issues, but it w a s not i m p l e m e n t e d ( S A F P 1 9 8 1 - 1 9 9 2 ; M e s a - L a g o 1 9 8 7 b , 1988a; M a r c e l a n d Arenas 1991).

Benefits

and Entitlement

Conditions

E n t i t l e m e n t c o n d i t i o n s and r e g u l a t i o n s f o r p e n s i o n s are u n i f o r m in the private s c h e m e . T h e o l d - a g e p e n s i o n r e q u i r e s 2 0 years of c o n t r i b u t i o n and a m i n i m u m age of 65 for males and 6 0 for f e m a l e s . Early retirement is allowed w h e n the individual i n s u r e d ' s a c c u m u l a t e d f u n d can finance a pension higher than 5 0 p e r c e n t of his or her a v e r a g e e a r n i n g s in the last 10 years and is equal to at least 110 percent of the m i n i m u m o l d - a g e pension. T h e o l d - a g e p e n s i o n f u n d c o n s i s t s of the i n s u r e d ' s net c o n t r i b u t i o n s ( a f t e r d e d u c t i n g c o m m i s s i o n s to the A F P ) , a state r e c o g n i t i o n b o n d , 7 the c o r r e s p o n d i n g inv e s t m e n t returns, and possibly the m o n e y f r o m a savings account. T h e i n s u r e d has three o p t i o n s at the t i m e of r e t i r e m e n t : (1) a life a n nuity f r o m a p r i v a t e i n s u r a n c e c o m p a n y , c a l c u l a t e d on the basis of the ins u r e d ' s s e x , a g e , a n d n u m b e r of b e n e f i c i a r i e s ; the c o m p a n y b e c o m e s the o w n e r of t h e a c c u m u l a t e d p e n s i o n f u n d ( w h i c h is t r a n s f e r r e d f r o m t h e A F P ) a n d g u a r a n t e e s a f i x e d m o n t h l y p e n s i o n f o r the i n s u r e d and his o r her s u r v i v o r s ( b u t t h e r e is n o r i g h t of i n h e r i t a n c e f o r w h a t is left of t h e f u n d in the a b s e n c e of s u r v i v o r s e n t i t l e d to the p e n s i o n ) ; the i n s u r e d ' s d e c i s i o n f o r this o p t i o n is i r r e v o c a b l e ; ( 2 ) a p r o g r a m m e d p e n s i o n p a i d d i r e c t l y by the A F P , a n n u a l l y c a l c u l a t e d ( a n d h e n c e f l u c t u a t i n g ) b a s e d o n the size and y i e l d of the f u n d , life e x p e c t a n c y c h a n g e s , and the n u m b e r of t h e i n s u r e d ' s b e n e f i c i a r i e s ; t h e i n s u r e d r e t a i n s o w n e r s h i p of the f u n d ( w h i c h can be i n h e r i t e d ) a n d c a n c h a n g e his or her d e c i s i o n at any t i m e ; ( 3 ) a p r o g r a m m e d p e n s i o n f o r a n u m b e r of y e a r s and a life annuity later. T h e A F P m u s t p r o v i d e all t h e n e e d e d i n f o r m a t i o n ( i n c l u d i n g f a c t s a b o u t the d i f f e r e n t i n s u r a n c e c o m p a n i e s ) f o r the i n s u r e d to m a k e a d e c i sion, but r e p o r t e d l y 9 0 p e r c e n t of the i n s u r e d d o not u n d e r s t a n d the c o m p l e x i t i e s i n v o l v e d a n d so hire e x p e r t s w h o c h a r g e f e e s r a n g i n g f r o m 3 - 5

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percent of the total value of the a c c u m u l a t e d f u n d (Gillion and Bonilla 1992). Furthermore, the A F P is never responsible if the insured's decision results in an insufficient length or amount of the pension. Disability and survivors pensions are paid not by the A F P but by the insurance c o m p a n y contracted for that purpose. A total disability pension (for loss of at least two-thirds of work capacity) pays 70 percent of the average earnings of the last 10 years to those younger than the standard retirement age, and a partial disability pension (for loss of at least one-half of work capacity) pays 50 percent. Survivor pensions are paid to w i d o w s or disabled widowers, children below age 18 (or 24 if a student, any age if an invalid), and parents if there are no other beneficiaries. A m i n i m u m pension is guaranteed by the state if the i n s u r e d ' s accumulated f u n d is not sufficient to finance that amount and if other requirements for old age or disability are met. Insured unemployed and part-time w o r k e r s are entitled to disability/survivors c o v e r a g e and the m i n i m u m pension for one year after dismissal if they have accumulated six months of contributions in the previous year. A public assistance pension is paid by the state to all the noninsured and those insured not entitled to minimum pensions. The entire social security system is denominated in terms of a separate monetary currency called Unidad de Fome'nto ( U F ) w h o s e value is adjusted monthly for inflation so that currency units maintain a constant value. All benefits (including pensions), individual accounts, and investment returns are expressed in terms of UF. A c o m p a r i s o n of the average level of pensions in the public and private s c h e m e s s h o w e d that by 1991 p r i v a t e - s c h e m e pensions were 43 percent higher for old age (U.S. $ 1 4 9 monthly pension in private scheme), 100 percent higher for disability (U.S. $206), and 46 percent higher for survivors (U.S. $92). But the validity of this comparison has been questioned on the grounds that in that year there were fewer than 100,000 pensioners in the private scheme but close to one million in the public scheme. Although no data are available, the level of pensions for the armed forces is probably higher than for the average pension in the private scheme; in 1980 the military pension was four times higher than the average general pension. And pensions for insured females are considerably lower than those for males because females have a lower retirement age and live longer. The minimum monthly pension appears insufficient to meet basic needs; it was U.S. $75 in 1991, equivalent to 22 percent of the average national wage, and it has been estimated that about half of the insured will receive a minimum pension. T h e public assistance pension is considerably lower (U.S. $36 in 1992); furthermore, the number of such pensions is limited to 300,000, there is a long waiting list, and the means test is reportedly very strict. Except for the presence of a minimum pension the private scheme does not apply the solidarity principle of social security, and even this minimum pension is financed with a state contribution

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o u t s i d e of t h e p e n s i o n s c h e m e ( M e s a - L a g o 1 9 8 8 a ; A r e l l a n o 1 9 8 9 ; F e r r a r a 1 9 8 9 ; S A F P 1 9 9 1 - 1 9 9 2 ; G i l l i o n a n d B o n i l l a 1992). E s t i m a t e s of t h e f u t u r e l e v e l s o f a v e r a g e p r i v a t e p e n s i o n s , b a s e d o n s i m u l a t i o n e x e r c i s e s , m a k e use of too m a n y a s s u m p t i o n s ; h e n c e , results vary w i d e l y d e p e n d i n g on w h e t h e r the a s s u m p t i o n s are o p t i m i s t i c or pess i m i s t i c . B a s e d o n a 5 p e r c e n t i n t e r e s t r a t e — w h i c h is j u d g e d c o n s e r v a t i v e in v i e w of t h e a v e r a g e y i e l d of 14 p e r c e n t f o r 1 9 8 1 - 1 9 9 1 — a C h i l e a n research institution has calculated a pension salary-replacement

rate of

8 0 - 8 6 percent for males and 5 3 - 5 6 percent for females ( C I E D E S S 1992). T h e I L O , u s i n g a 3 p e r c e n t i n t e r e s t r a t e — w h i c h is c o n s i d e r e d b y t h e a u t h o r s to b e h i g h — h a s in t u r n p r o j e c t e d a 4 4 p e r c e n t r e p l a c e m e n t r a t e f o r m a l e s ( G i l l i o n a n d B o n i l l a 1 9 9 2 ) . It is b a s e d o n a f u l l r a t e c o n t r i b u t i o n , b u t if t h e a c t u a l p e r c e n t a g e of c o n t r i b u t o r s a m o n g t h e r e g i s t e r e d is u s e d t h e r e p l a c e m e n t r a t e d e c l i n e s to 3 0 p e r c e n t . P r o c e s s i n g of t h e p e n s i o n s h a s b e e n g r e a t l y s i m p l i f i e d a n d

made

m u c h f a s t e r in t h e p r i v a t e s c h e m e . A n a p p l i c a t i o n f o r m c a n b e m a i l e d o r p r e s e n t e d to any A F P , and the i n d i v i d u a l a c c o u n t s facilitate the p r o c e s s . A c c o r d i n g to o n e s o u r c e t h e f i r s t p e n s i o n c h e c k is u s u a l l y r e c e i v e d w i t h i n 15 t o 3 0 d a y s a f t e r t h e a p p l i c a t i o n is s u b m i t t e d , b u t a n o t h e r s o u r c e g i v e s an a v e r a g e p e r i o d of t h r e e m o n t h s . S i n c e 1 9 9 0 a p r e l i m i n a r y p e n s i o n h a s b e e n p a i d 1 0 d a y s a f t e r t h e a p p l i c a t i o n is f i l e d a n d h a s b e e n r e a d j u s t e d l a t e r . In 1 9 8 8 a s y s t e m of v o l u n t a r y s a v i n g s a c c o u n t s , h a n d l e d by t h e A F P s , w a s i n t r o d u c e d , a n d t o t a l s a v i n g s h a d i n c r e a s e d t h r e e - f o l d by 1991 (Mesa-Lago

1988a; Arellano

1991; Margozzini

Insured

Contributions

1989; Ferrara 1989; Iglesias and

Acuña

1991).

and

Commissions

In b o t h t h e p u b l i c a n d p r i v a t e p e n s i o n s c h e m e s o n l y t h e i n s u r e d c o n t r i b u t e , b u t t h e s t a t e f i n a n c e s t h e d e f i c i t of t h e p u b l i c s c h e m e a n d c o n t r i b u t e s to t h e p r i v a t e s c h e m e as w e l l ( a s d i s c u s s e d in d e t a i l b e l o w ) . T h e e m p l o y e r ' s c o n t r i b u t i o n f o r p e n s i o n s w a s a b o l i s h e d in 1 9 8 0 , a n d o t h e r e m p l o y e r s ' c o n t r i b u t i o n s (for u n e m p l o y m e n t c o m p e n s a t i o n and family all o w a n c e s ) w e r e e l i m i n a t e d in 1 9 8 8 a n d t o t a l l y a b s o r b e d b y t h e s t a t e , e x cept for e m p l o y m e n t injury. T h e insured percentage contribution for pens i o n s is u n i f o r m in t h e p r i v a t e s c h e m e ( a l t h o u g h t h e r e a r e still d i f f e r e n c e s in t h e p u b l i c s c h e m e ) : 1 0 p e r c e n t f o r o l d a g e p l u s an a d d i t i o n a l

2.5-3.7

p e r c e n t ( v a r y i n g a m o n g A F P s ) , of w h i c h 0 . 8 5 - 1 . 7 p e r c e n t p a y s t h e p r e m i u m f o r d i s a b i l i t y a n d s u r v i v o r s c o v e r a g e t o b e p r o v i d e d by an i n s u r a n c e c o m p a n y a n d t h e r e m a i n i n g 1 . 7 5 - 2 . 8 4 p e r c e n t p r o v i d e s a c o m m i s s i o n to t h e A F P . T h e r e is a v o l u n t a r y a d d i t i o n a l c o n t r i b u t i o n of 1 0 p e r c e n t to inc r e a s e t h e b a s i c o l d - a g e p e n s i o n , a v a i l a b l e f o r s a l a r i e d w o r k e r s b u t not f o r the s e l f - e m p l o y e d . T h e total c o m p u l s o r y c o n t r i b u t i o n s to p e n s i o n s r a n g e f r o m 1 2 . 5 - 1 3 . 7 p e r c e n t . In a d d i t i o n , t h e i n s u r e d pay 7 p e r c e n t f o r s i c k n e s s /

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m a t e r n i t y f o r a m a n d a t o r y total of 1 9 . 5 - 2 0 . 7 p e r c e n t in t h e p r i v a t e s c h e m e a n d 2 5 . 6 - 2 7 . 7 p e r c e n t in the p u b l i c s c h e m e . T h e l o w e r c o n t r i b u t i o n in the p r i v a t e s c h e m e w a s i n i t i a l l y j u s t i f i e d by its a l l e g e d l y m o r e e f f i c i e n t a d m i n i s t r a t i o n , but it w a s l a r g e l y the r e s u l t of t h e 1 9 7 9 r e f o r m that e l i m i nated costly b e n e f i t s a n d t i g h t e n e d e n t i t l e m e n t c o n d i t i o n s . T h e s e s a v i n g s w e r e not p a s s e d on to the i n s u r e d in the p u b l i c s c h e m e in o r d e r to p r o v i d e an incentive f o r t r a n s f e r r i n g to t h e p r i v a t e s c h e m e ( A r e l l a n o 1989; M e s a L a g o 1989c; S A F P 1992). T h e insured m u s t pay to the A F P f r e e l y set c o m m i s s i o n s , u s u a l l y of t w o types: a fixed s u m ( d e d u c t e d f r o m the 10 p e r c e n t c o n t r i b u t i o n f o r o l d a g e p e n s i o n s ) and a v a r i a b l e p e r c e n t a g e ( d e d u c t e d f r o m the c o n t r i b u t i o n to d i s a b i l i t y / s u r v i v o r s c o v e r a g e ) . Until 1 9 8 7 t h e r e w a s a third c o m m i s s i o n c o n s i s t i n g of a p e r c e n t a g e of the b a l a n c e in t h e i n d i v i d u a l a c c o u n t . In that s a m e year the v a r i a b l e - p e r c e n t a g e c o m m i s s i o n (until t h e n h i d d e n w i t h i n the p a y m e n t for the d i s a b i l i t y / s u r v i v o r s p r e m i u m ) w a s m a d e t r a n s p a r e n t , i.e., the A F P must n o w s e p a r a t e it f r o m the p r e m i u m . It w a s n o t e d a b o v e that the c o m m i s s i o n r e p r e s e n t e d a b o u t 7 0 p e r c e n t of t h e total p a y m e n t m a d e by the insured (the o t h e r 3 0 p e r c e n t g o i n g to pay the p r e m i u m ) . B e c a u s e of the large n u m b e r of i n s u r e d in the A F P s , i n s u r a n c e c o m p a n i e s red u c e d the d i s a b i l i t y / s u r v i v o r s p r e m i u m ; h o w e v e r , the r e s u l t i n g e c o n o m i e s of s c a l e w e r e not t r a n s f e r r e d to t h e i n s u r e d b u t r a t h e r a b s o r b e d by t h e A F P . T h e 1987 r e f o r m t h e r e f o r e put p r e s s u r e on the A F P s to cut d o w n the percentage commission ( M e s a - L a g o 1987b, 1988a). T h e f i x e d c o m m i s s i o n h a s a r e g r e s s i v e e f f e c t b e c a u s e it is p r o p o r tionally higher a m o n g the l o w e r - i n c o m e insured (thereby reducing both their net c o n t r i b u t i o n s f o r o l d - a g e p e n s i o n s a n d their i n v e s t m e n t r e t u r n s ) . For instance, in 1 9 8 7 the c o m m i s s i o n r e p r e s e n t e d an 18 p e r c e n t r e d u c t i o n in the d e p o s i t of an i n s u r e d i n d i v i d u a l in t h e 1 0 , 0 0 0 - p e s o s - p e r - m o n t h b r a c k e t but only a 0 . 9 p e r c e n t r e d u c t i o n f o r s o m e o n e in the 1 0 0 , 0 0 0 - p e s o b r a c k e t . For the s a m e r e a s o n the i n v e s t m e n t y i e l d f o r t h e l o w e s t i n c o m e b r a c k e t a v e r a g e d 7 . 6 p e r c e n t f r o m 1 9 8 1 - 1 9 8 7 , c o m p a r e d with 1 1 . 3 4 percent f o r the 6 0 , 0 0 0 - p e s o b r a c k e t . B e c a u s e of s u c h r e g r e s s i o n t h e f i x e d c o m m i s s i o n w a s t h e s u b j e c t of s t r o n g c r i t i c i s m in the 1 9 8 0 s f r o m b o t h domestic and foreign experts w h o suggested alternative approaches; howe v e r , the s m a l l e r A F P s o p p o s e d s u c h a c h a n g e ( b e c a u s e t h e y h a v e m o r e l o w e r - i n c o m e i n s u r e d a n d t h e f i x e d c o m m i s s i o n g e n e r a t e d m o s t of t h e i r r e v e n u e ) , and the g o v e r n m e n t a l s o r e s i s t e d t h e m o d i f i c a t i o n . T h e e l i m i n a t i o n of the c o m m i s s i o n o n t h e b a l a n c e s of i n d i v i d u a l a c c o u n t s , the c l e a r e r d i s t i n c t i o n b e t w e e n c o m m i s s i o n s a n d i n s u r a n c e p r e m i u m s , and p u b l i c c r i t i c i s m of the f i x e d c o m m i s s i o n h a v e led to d e c l i n e s in t h e l e v e l s of b o t h t h e s p e c i f i c a n d c o m b i n e d c o m m i s s i o n s . In c u r r e n t p e s o s the f i x e d m o n t h l y c o m m i s s i o n r e a c h e d a p e a k of 6 9 5 in 1 9 8 3 a n d d e c l i n e d to 2 5 0 in 1991 ( f o u r A F P s d o n o t c h a r g e this t y p e of c o m m i s s i o n ) ; in c o n s t a n t p e s o s t h e c o m m i s s i o n d e c l i n e d by t h r e e - f o u r t h s . T h e

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a v e r a g e p e r c e n t a g e c o m m i s s i o n p e a k e d at 3 . 6 p e r c e n t in 1 9 8 3 a n d d e c l i n e d t o 3 . 1 p e r c e n t in 1 9 9 1 . T h e t o t a l c o m b i n e d c o m m i s s i o n

decreased

f r o m 4 . 5 p e r c e n t to 3 . 6 p e r c e n t f r o m 1 9 8 3 - 1 9 9 0 . C o s t s o f t h e c o m b i n e d c o m m i s s i o n f o r an i n s u r e d w i t h an a v e r a g e s a l a r y i n c r e a s e d f r o m 8 . 3 p e r c e n t in 1 9 8 1 to 1 2 . 3 p e r c e n t in 1 9 8 3 a n d d e c l i n e d t h e r e a f t e r to 9 p e r c e n t in 1 9 9 1 . A s t h e f i x e d c o m m i s s i o n d e c l i n e d , b o t h in a b s o l u t e l e v e l a n d a s a share o f the c o m b i n e d c o m m i s s i o n ( f r o m 5 4 percent to 10 percent from 1 9 8 2 - 1 9 9 1 ) , its r e g r e s s i v e e f f e c t a l s o d i m i n i s h e d , a l t h o u g h t h i s e f f e c t h a s not b e e n c o m p l e t e l y e l i m i n a t e d . D e s p i t e w i d e c r i t i c i s m o f t h e f i x e d c o m m i s s i o n b y e x p e r t s w h o n o w h a v e p r o m i n e n t p o s i t i o n s in t h e n e w d e m o c r a t i c g o v e r n m e n t , it h a s not b e e n a b o l i s h e d , a p p a r e n t l y b e c a u s e o f t e c h nical

difficulties.

Finally,

differences

in

the

combined

commissions

c h a r g e d b y the v a r i o u s A F P s h a v e g r a d u a l l y s h r u n k — a l l e g e d l y a s a r e s u l t o f i n c r e a s e d c o m p e t i t i o n a m o n g t h e m ; t h i s is d i s c u s s e d in m o r e d e t a i l in a later s e c t i o n ( S A F P 1 9 8 3 - 1 9 9 2 ; M e s a - L a g o 1 9 8 7 b , 1 9 8 8 a ; A r e l l a n o

1989;

B o n i l l a Garcia 1 9 9 1 ; C h e y r e V a l e n z u e l a 1 9 9 1 ; M a r c e l and Arenas

1991;

Arrau 1 9 9 2 ; C I E D E S S

1992).

Investment T h e c o m b i n e d p e n s i o n f u n d s o f all A F P s i n c r e a s e d b y t w o - f o l d e v e r y t w o or three years from

1981-1991;

in 1 9 9 1 t h e y r e a c h e d U . S . $ 1 0 b i l l i o n ,

e q u a l to 3 4 . 5 p e r c e n t o f G D P a n d h a l f o f t h e e x t e r n a l d e b t 1992; S A F P

(CIEDESS

1 9 9 2 ) . It is p r o j e c t e d t h a t u n d e r f a v o r a b l e c o n d i t i o n s

the

f u n d s w i l l r e a c h 5 0 p e r c e n t o f G D P in the y e a r 2 0 0 0 a n d 1 0 0 p e r c e n t in 2025. The

real

annual

investment

y i e l d w a s as f o l l o w s :

12.7

percent

( 1 9 8 1 ) . 2 6 . 5 percent ( 1 9 8 2 ) , 22.7 percent ( 1 9 8 3 ) , 2.9 percent ( 1 9 8 4 ) , percent

(1985),

12.0

percent

(1986),

6.4

percent

(1987),

4.8

13.4

percent

( 1 9 8 8 ) , 6 . 7 percent ( 1 9 8 9 ) , 17.7 percent ( 1 9 9 0 ) , and 2 8 . 6 percent ( 1 9 9 1 ) . T h e a v e r a g e a n n u a l r e a l y i e l d f o r 1 9 8 1 - 1 9 9 1 w a s 14 p e r c e n t , the h i g h e s t in L a t i n A m e r i c a a n d t h e C a r i b b e a n . T h e y i e l d s t e a d i l y s u r p a s s e d ( e x c e p t for 1 9 8 1 ) the real c o m m e r c i a l b a n k interest for short- and long-term d e p o s i t s , but m a n y c l a i m that s u c h h i g h y i e l d s w i l l not b e s u s t a i n a b l e in t h e future. T h e r e h a s b e e n a g r a d u a l d i v e r s i f i c a t i o n o f the p o r t f o l i o , p a r t i c u l a r l y a f t e r l a w s in 1 9 8 5 ,

1 9 8 9 , and 1 9 9 0 e x p a n d e d the r a n g e o f

instruments.

T h e c e n t r a l b a n k d e t e r m i n e s t h e c e i l i n g s f o r i n v e s t m e n t in p a r t i c u l a r i n s t r u m e n t s ; in 1 9 9 1 t h e y w e r e a s f o l l o w s : 4 5 p e r c e n t ( r e d u c e d f r o m 5 0 p e r c e n t ) for state securities; 8 0 percent for mortgage bills; 3 0 - 5 0 percent for f i x e d bank d e p o s i t s ; 3 0 percent for p u b l i c and private b o n d s ; 1 0 - 3 0 perc e n t f o r s h a r e s ; a n d 1 - 1 0 p e r c e n t f o r f o r e i g n i n s t r u m e n t s . In 1 9 8 3 , a f t e r t h e c r i s i s a n d t h e s u b s e q u e n t s t a t e i n t e r v e n t i o n in s e v e r a l b a n k s a n d e n t e r p r i s e s to p r e v e n t w i d e s p r e a d b a n k r u p t c y , 9 7 p e r c e n t o f i n v e s t m e n t w a s in d e b t i n s t r u m e n t s ( e . g . , 4 4 . 5 p e r c e n t in s t a t e s e c u r i t i e s , 5 0 . 7 p e r c e n t in

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125

m o r t g a g e bills) and 7 2 p e r c e n t w a s in s t a t e i n s t r u m e n t s . T h i s w a s c o n s i d e r e d to b e d a n g e r o u s , so a 1985 law a l l o w e d i n v e s t m e n t in s h a r e s a n d private b o n d s , and a 1990 law did the s a m e f o r f o r e i g n i n s t r u m e n t s . In 1983 the p o r t f o l i o d i s t r i b u t i o n w a s as f o l l o w s : 4 4 p e r c e n t in s t a t e s e c u r i t i e s , 51 p e r c e n t in m o r t g a g e bills, 3 p e r c e n t in b a n k d e p o s i t s a n d b o n d s , 2 p e r c e n t in e n t e r p r i s e b o n d s , a n d n o t h i n g in s h a r e s . By 1991 t h e p o r t f o l i o w a s m u c h m o r e d i v e r s i f i e d : 3 8 p e r c e n t in s t a t e s e c u r i t i e s , 14 p e r c e n t in m o r t g a g e b i l l s , 13 p e r c e n t in b a n k d e p o s i t s a n d b o n d s , a n d 2 4 p e r c e n t in e n t e r p r i s e s h a r e s . T h e r e f o r e o n l y 3 8 p e r c e n t of the p o r t f o l i o w a s in s t a t e ins t r u m e n t s and 6 5 p e r c e n t in d e b t i n s t r u m e n t s ( M e s a - L a g o 1991a; I g l e s i a s a n d A c u n a 1991; S A F P 1 9 8 3 - 1 9 9 2 ) . T h e c r e a t o r s of the p r i v a t e s c h e m e initially b e l i e v e d that it w o u l d h e l p s i g n i f i c a n t l y d e v e l o p the d o m e s t i c c a p i t a l m a r k e t ( P i h e r a 1991); a l t h o u g h the m a r k e t has i n d e e d g r o w n , the h u g e a c c u m u l a t i o n of p e n s i o n f u n d s has not m e t the o r i g i n a l e x p e c t a t i o n s . O n l y in 1991 d i d the p r o p o r t i o n of inv e s t m e n t in p r i v a t e - e n t e r p r i s e s h a r e s a n d b o n d s e x c e e d o n e - t h i r d of t h e total. It is a r g u e d that the h i g h y i e l d s of the 1980s r e f l e c t e d a s i m i l a r perf o r m a n c e in o t h e r s t o c k a n d b o n d m a r k e t s t h r o u g h o u t t h e w o r l d as t h e y r e c o v e r e d f r o m the d e c l i n e s u f f e r e d in t h e s e c o n d half of the 1970s a n d the start of the 1980s; the s l o w d o w n in C h i l e a n p e n s i o n f u n d y i e l d s f r o m 1 9 8 7 - 1 9 8 9 thus r e f l e c t e d a s i m i l a r d o w n w a r d w o r l d t r e n d . T h e very high C h i l e a n y i e l d s of 1 9 9 0 - 1 9 9 1 are t h e n e x p l a i n e d by the h i g h d e m a n d f o r t h e s e t y p e s of i n s t r u m e n t s ( p a r t i c u l a r l y s h a r e s ) a n d the r e l a t i v e l y f e w that a r e e l i g i b l e f o r A F P i n v e s t m e n t . ( A c o m m i s s i o n f o r risk c l a s s i f i c a t i o n r a n k s t h e s u i t a b i l i t y of s t o c k s f o r A F P i n v e s t m e n t a c c o r d i n g to their deg r e e s of risk; since t h e late 1980s t h e r e h a v e b e e n s e v e r a l p r i v a t e c o r p o r a t i o n s in o p e r a t i o n that i n f o r m a l l y c l a s s i f y s t o c k s a n d t h u s can c h a l l e n g e the o f f i c i a l r a n k i n g . ) O t h e r c o n c e r n s v o i c e d by e x p e r t s a r e ( 1 ) A F P s c a n i n v e s t j o i n t l y or s e p a r a t e l y in o n e s i n g l e e n t e r p r i s e , t h e r e b y i n f l u e n c i n g the v a l u e of that e n t e r p r i s e ' s s h a r e s ; ( 2 ) i n s u r a n c e c o m p a n i e s that a r e s h a r e h o l d e r s in an A F P c a n a l s o i n v e s t in s h a r e s ; a n d ( 3 ) t h e high b o o k v a l u e of an A F P i n v e s t m e n t is not n e c e s s a r i l y the m a r k e t v a l u e of the ins t r u m e n t , e . g . , i n v e s t m e n t in s t a t e s e c u r i t i e s ( M e s a - L a g o 1 9 8 8 a ; B o n i l l a G a r c i a 1 9 9 1 ; Gillion and B o n i l l a 1 9 9 2 ) . A n o p p o s i t e v i e w p o i n t is that t h e p e n s i o n f u n d s h a v e s i g n i f i c a n t l y c o n t r i b u t e d t o w a r d i n c r e a s i n g d o m e s t i c a n d f o r e i g n c o n f i d e n c e in the S a n tiago s t o c k m a r k e t and h a v e s t i m u l a t e d the g r o w t h of i n s u r a n c e c o m p a n i e s . In a d d i t i o n , the f u n d s h a v e p l a y e d a p r i n c i p a l role in d e b t - e q u i t y s w a p s , thus r e d u c i n g the external d e b t a n d p r o m o t i n g f o r e i g n i n v e s t m e n t . It is also a r g u e d t h a t the C h i l e a n m o d e l p r o v e s that t h e e x i s t e n c e of a m a t u r e d o m e s t i c c a p i t a l m a r k e t is not an e s s e n t i a l p r e r e q u i s i t e f o r p e n s i o n p r i v a t i z a tion ( C h e y r e V a l e n z u e l a 1991; Iglesias a n d A c u n a 1991; S a n t a m a r i a 1 9 9 2 ) . A n o t h e r i m p o r t a n t q u e s t i o n is w h e t h e r e n o u g h a l t e r n a t i v e s f o r investm e n t of t h e p e n s i o n f u n d s will be a v a i l a b l e in t h e n e a r f u t u r e . If t h e total

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v a l u e of the f u n d g r o w s to equal 5 0 p e r c e n t of G D P by the year 2 0 0 0 , it might f o s t e r higher rates of i n v e s t m e n t ( p r o v i d e d there are e n o u g h opportunities) and e c o n o m i c g r o w t h . C o n v e r s e l y , if capital supply e x c e e d s dem a n d , the rates of return might d e c l i n e a n d / o r capital o u t f l o w s increase. O n e v i e w is that o p p o r t u n i t i e s for i n v e s t m e n t w e r e dramatically e x p a n d e d in the 1980s by the g o v e r n m e n t privatization p r o g r a m but that now, w h e n the p r o c e s s is virtually c o m p l e t e d , there are f e w e r o p p o r t u n i t i e s . T h e public sector c a n n o t c o n t i n u e e m i s s i o n of p u b l i c securities at the s a m e pace, there are o b v i o u s l i m i t a t i o n s to the e x p a n s i o n of e n t e r p r i s e s h a r e s and b o n d s , and i n v e s t m e n t in p e r s o n a l / m o r t g a g e loans a n d h o u s i n g c o n s t r u c tion is c o n s i d e r e d too risky. R e c e n t l y i n v e s t m e n t in real estate has been a l l o w e d in the f o r m of s h a r e s of m u t u a l f u n d s . T h e 1990 authorization to invest in f o r e i g n i n s t r u m e n t s (with a c e i l i n g i n c r e a s i n g f r o m 1 percent to 10 percent f r o m 1 9 9 1 - 1 9 9 6 ) has been seen by s o m e as a way out f r o m the c o n s t r a i n t s of the d o m e s t i c capital m a r k e t . A study by the C e n t r o de Estudios P u b l i c o s a r g u e s that if 10 p e r c e n t had b e e n i n v e s t e d in p u b l i c b o n d s of d e v e l o p e d c o u n t r i e s in 1990 and 1991, there w o u l d have been an increase in the yield of 0.5 p e r c e n t a g e p o i n t s , or 1.2 points if the investment had been in s h a r e s f r o m J a p a n , the U n i t e d States, and E n g l a n d . But a n o t h e r g r o u p o p p o s e s the export of d o m e s t i c s a v i n g s (Arrau 1991; Marcel and A r e n a s 1991; M a r g o z z i n i 1991; M e s a - L a g o 1991a). Finally, t h e r e is the issue of the i m p a c t of the private pension f u n d s on national s a v i n g s and investment. T h e original a r g u m e n t of the f o u n d e r s of the s c h e m e w a s that the r e p l a c e m e n t of the p a y - a s - y o u - g o system by a fully f u n d e d p e n s i o n s c h e m e w o u l d increase capital a c c u m u l a t i o n (Pinera 1991). A d i v e r g e n t v i e w p o i n t w a s that in o r d e r to have such a positive effect the A F P s ' s a v i n g s had to be greater than the public deficit g e n e r a t e d by the r e f o r m ( A r e l l a n o 1989). R e c e n t a n a l y s e s of the r e l a t i o n s h i p c o n ducted by e x p e r t s with d i f f e r e n t v i e w s c o n c u r that there is no c o n c l u s i v e e v i d e n c e that private pensions have g e n e r a t e d higher national savings. For instance, in 1 9 8 9 - 9 0 the increase in national s a v i n g s w a s induced by external s a v i n g s and in 1991 by private s a v i n g s o u t s i d e of the A F P s (Arrau 1992; C I E D E S S 1992; Gillion and B o n i l l a 1992; S a n t a m a r i a 1992).

The Burden

of the Pension

Deficit and State

Subsidies

T h e cost of social security in Chile w a s the highest in Latin A m e r i c a and the C a r i b b e a n , with the p o s s i b l e e x c e p t i o n of C u b a in the second half of the 1980s. S o c i a l s e c u r i t y e x p e n d i t u r e s as a p e r c e n t a g e of G D P steadily increased in the 1960s, p e a k e d at 17.5 p e r c e n t in 1971 (a historic record in the W e s t e r n h e m i s p h e r e ) , d e c l i n e d to 9 . 3 p e r c e n t in 1975, steadily rose again to 15.6 p e r c e n t in 1982 (in the midst of the crisis), and decreased to 13.1 p e r c e n t in 1986. T w o - t h i r d s of the e x p e n d i t u r e s w e r e for all the p e n s i o n p r o g r a m s . T h e a c t i v e / p a s s i v e r a t i o ( n u m b e r of active w o r k e r s

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c o n t r i b u t i n g per p e n s i o n e r ) s t e a d i l y d e c l i n e d f r o m 1 0 . 6 in 1 9 6 0 to 4 . 4 in 1 9 7 0 , 2 . 2 in 1 9 8 0 , a n d 1.9 in 1 9 8 8 . T h e d e c r e a s e in the s h a r e of s o c i a l sec u r i t y e x p e n d i t u r e s as a part of G D P f r o m 1 9 8 2 - 1 9 8 6 a n d the s l o w d o w n in t h e d e c l i n e of t h e a c t i v e / p a s s i v e r a t i o in t h e 1 9 8 0 s a r e b o t h r e s u l t s of the social s e c u r i t y r e f o r m , in p a r t i c u l a r t h e i n c r e a s e in a g e s of r e t i r e m e n t ( M e s a - L a g o 1988a, 1989c, 1991b). T h e state c o n t r i b u t e s to t h e p r i v a t e p e n s i o n s c h e m e in t w o w a y s : ( 1 ) p a y i n g r e c o g n i t i o n b o n d s , w h i c h are e s t i m a t e d to a c c o u n t f o r o n e - h a l f to t h r e e - f o u r t h s of the c a p i t a l of t h o s e r e t i r i n g until t h e e n d of this c e n t u r y , or an a v e r a g e of n i n e y e a r s ' w o r t h of p e n s i o n f u n d s ( p a i d by t h e s t a t e all at o n c e i n s t e a d of s p r e a d t h r o u g h o u t t h e r e t i r e m e n t p e r i o d as in t h e p u b lic s c h e m e ) ; a n d ( 2 ) m a k i n g u p t h e d i f f e r e n c e to p r o v i d e m i n i m u m p e n s i o n s f o r t h o s e w h o lack s u f f i c i e n t f u n d s in an A F P (it is e s t i m a t e d that at the e n d of t h e 1 9 9 0 s t h e a n n u a l c o s t of this p r o g r a m will b e U . S . $ 6 0 million). In a d d i t i o n , t h e s t a t e has to f i n a n c e the d e f i c i t of the p u b l i c p e n s i o n s c h e m e (civilian and armed forces), public assistance pensions, unemployment compensation, family allowances, and health care for indigents. T h e r e f o r e , to s e c u r e a s o u n d p r i v a t e p e n s i o n s c h e m e , t h e s t a t e h a s m a d e a f i n a n c i a l c o m m i t m e n t f o r h u g e l o n g - r u n or p e r m a n e n t c o n t r i b u t i o n s to the e n t i r e social s e c u r i t y s y s t e m ( A r e l l a n o 1 9 8 9 ; B o n i l l a G a r c i a 1 9 9 1 ) . If all t h e r e v e n u e s a n d e x p e n d i t u r e s of t h e social s e c u r i t y s y s t e m a r e t a k e n into a c c o u n t , the s y s t e m a p p e a r s to h a v e g e n e r a t e d a s u r p l u s in the 1 9 8 0 s . H o w e v e r , w h e n the s t a t e s u b s i d y ( e x c l u d i n g the c o n t r i b u t i o n of t h e state as an e m p l o y e r ) is s u b t r a c t e d , the s u r p l u s t u r n s into a d e f i c i t that inc r e a s e d f r o m 1.7 p e r c e n t in 1 9 8 0 to a p e a k of 8 . 2 p e r c e n t in 1 9 8 2 a n d then s l o w e d d o w n to 5 p e r c e n t f o r 1 9 8 9 - 1 9 9 0 . W i t h i n t h e p e n s i o n s y s t e m , in 1 9 8 8 t h e p r i v a t e s c h e m e h a d 8 4 p e r c e n t of t h e total n u m b e r of a c t i v e c o n t r i b u t o r s a n d o n l y 4 p e r c e n t of t h e total n u m b e r of p e n s i o n e r s ; h e n c e , it g e n e r a t e d a s u b s t a n t i a l s u r p l u s . B u t t h e p u b l i c s e c t o r (i.e., c i v i l i a n , a r m e d f o r c e s , a n d p u b l i c a s s i s t a n c e p e n s i o n s ) had o n l y 16 p e r c e n t of t h e a c t i v e c o n t r i b u t o r s a n d 9 6 p e r c e n t of t h e p e n s i o n e r s , so it e n d e d in a h u g e d e f i c i t that i n c r e a s e d f r o m 2 . 2 p e r c e n t of G D P in 1981 to 6 . 3 p e r c e n t in 1 9 8 6 ( 8 7 p e r c e n t of e x p e n d i t u r e s w e r e s u b s i d i z e d b y the s t a t e ) . T h e c o m p o s i t i o n of t h e p u b l i c p e n s i o n d e f i c i t in 1 9 8 6 w a s as f o l l o w s : 5 7 . 8 p e r c e n t c i v i l i a n p e n s i o n s , 3 3 . 5 p e r c e n t a r m e d f o r c e s p e n s i o n s , a n d 8 . 7 p e r c e n t p u b l i c assistance pensions (Mesa-Lago 1988a, 1991b). U n f o r t u n a t e l y t h e r e are n o c o n s o l i d a t e d d a t a to e s t i m a t e t h e b a l a n c e of t h e e n t i r e social s e c u r i t y s y s t e m . E x p e r t s p r o v i d e d i f f e r e n t e s t i m a t e s of the s t a t e s u b s i d y (as a p e r c e n t a g e of G D P ) r e q u i r e d to c o v e r t h e c o s t of t h e d e f i c i t s in v a r i o u s s e c t o r s : ( 1 ) t h e d e f i c i t in t h e o l d p e n s i o n s y s t e m w a s 3 . 5 p e r c e n t in 1981 a n d 3 . 2 p e r c e n t in 1991 ( C I E D E S S 1 9 9 2 ) ; ( 2 ) t h e s t a t e s u b s i d y to t h e p r i v a t e s y s t e m w a s 6 p e r c e n t in 1 9 9 0 ( G i l l i o n a n d B o n i l l a 1 9 9 2 ) ; (3;) t h e d e f i c i t r e l a t e d to t h e p e n s i o n r e f o r m ( t h e o p e r a tional d e f i c i t p l u s t h e c o s t of r e c o g n i t i o n b o n d s ) w a s 1.2 p e r c e n t in 1981

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and 4.8 p e r c e n t in 1991; w h e n a r m e d f o r c e s p e n s i o n s and other s t a t e - s u p ported s c h e m e s (e.g., p u b l i c a s s i s t a n c e p e n s i o n s ) are a d d e d the d e f i c i t inc r e a s e s to 4.1 percent in 1981 a n d 5 percent in 1991 (Arrau 1992); a n d (4) the deficit of the entire social security s y s t e m (without s p e c i f i c s ) w a s 7.4 p e r c e n t in 1 9 8 4 a n d 4.1 p e r c e n t in 1991 ( S a n t a m a r i a 1992). T h e lack of c o h e r e n c e of t h e s e f i g u r e s a n d i m p r e c i s i o n of e x a c t l y w h a t they c o v e r points to the dearth of a c c u r a t e global data. But it is clear that the s t a t e ' s c o m m i t m e n t to the p e n s i o n s c h e m e has r e d u c e d p u b l i c f u n d s f o r s u c h other p r o g r a m s as health care for the lowest i n c o m e g r o u p s . T h e deficit in the p u b l i c pension sector will last for a n o t h e r 25 years; it is e s t i m a t e d that it will peak in the m i d - 1 9 9 0 s and slow d o w n t h e r e a f t e r ; c o n t r i b u t i o n s will s t o p in 2 0 3 8 , and the last p e n s i o n s will be paid in 2 0 5 0 . T h e deficit induced by the recognition b o n d s will keep g r o w i n g until 2 0 0 7 and then s l o w d o w n ; s o m e e s t i m a t e s place this deficit at t w i c e as high as the initial c a l c u l a t i o n s . T h e c o m b i n e d deficit for the public a s s i s t a n c e and m i n i m u m p e n s i o n s will be p e r m a n e n t and will exhibit an i n c r e a s i n g trend. T h e total pension deficit will peak in the year 2 0 0 0 and by 2 0 1 6 will equal 2.2 percent of G D P ( d o w n f r o m 6.3 percent in 1986), but other e s t i m a t e s give h i g h e r f i g u r e s b e c a u s e of u n d e r e s t i m a t e s of the cost of the r e c o g n i tion b o n d s and the public assistance and m i n i m u m p e n s i o n s . It is u n c l e a r how the state will f i n a n c e the pension deficit: with taxes, p u b l i c d e b t , a r e d u c t i o n in c o n s u m p t i o n , or a c o m b i n a t i o n of all three. S o m e s i m u l a t i o n s t u d i e s have a n a l y z e d the v a r i o u s a l t e r n a t i v e s and their potential e f f e c t s . F i n a n c i n g the deficit with p u b l i c debt will place the burden on f u t u r e g e n e r a t i o n s and the y o u n g to the b e n e f i t the current g e n e r a tion and the old; f i n a n c i n g with taxes will place the b u r d e n on the c u r r e n t g e n e r a t i o n . T h e first a l t e r n a t i v e has so far been p r e d o m i n a n t ; it has been e s t i m a t e d that if all the d e f i c i t is f i n a n c e d t h r o u g h p u b l i c d e b t , the d e b t will increase f r o m 25 p e r c e n t to 67 percent of G D P in 30 years and later stabilize at 5 6 percent ( A r r a u 1992). T h e r e is a dearth of actuarial s t u d i e s and even a lack of f i n a n c i a l data f o r the e n t i r e p u b l i c a n d p r i v a t e p e n s i o n s y s t e m . T h e s a m e is t r u e of global s i m u l a t i o n e x e r c i s e s b a s e d on total c o n t r i b u t i o n s , i n v e s t m e n t returns, state s u b s i d i e s , and e x p e n d i t u r e s . T h e s e data and s t u d i e s are badly n e e d e d to d e t e r m i n e the f u t u r e e q u i l i b r i u m of the s y s t e m a n d a s s e s s the s t a t e ' s e c o n o m i c capacity to s u b s i d i z e it.

Administration T h e c r e a t o r s of the p r i v a t e p e n s i o n s c h e m e a s s u m e d that its m a r k e t elem e n t s (i.e., f r e e entry and exit, c o m p e t i t i o n , f l e x i b l e selection of A F P s by the i n s u r e d ) , c o m b i n e d with s t a t e s u p e r v i s i o n a n d m i n i m u m g u a r a n t e e s , w o u l d e n s u r e its e f f i c i e n c y a n d result in e x p a n d e d p o p u l a t i o n c o v e r a g e , r e d u c e d e v a s i o n a n d p a y m e n t d e l a y s , an i n c r e a s e d n u m b e r of A F P s ,

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decreased administrative costs and c o m m i s s i o n s , and m a x i m i z e d investm e n t y i e l d s ( P i n e r a 1991). I h a v e n o t e d that s o m e of t h e s e g o a l s h a v e not b e e n m e t (i.e., c o v e r a g e , c o m p l i a n c e ) , w h e r e a s o t h e r s h a v e (i.e., i n v e s t m e n t y i e l d s , c o m m i s s i o n s ) . In this s e c t i o n I a n a l y z e w h e t h e r the s y s t e m is truly c o m p e t i t i v e a n d d i s c u s s its e f f e c t s on a d m i n i s t r a t i v e e f f i c i e n c y a n d the role of the s t a t e in e s t a b l i s h i n g m i n i m u m g u a r a n t e e s . T h e n u m b e r of A F P s w a s p r a c t i c a l l y s t a g n a n t in t h e f i r s t d e c a d e of the s c h e m e . Initially t h e r e w e r e 12 A F P s , a n d by 1991 t h e r e w e r e 13. Of t h e s e 13, 10 had b e e n t h e r e s i n c e the s c h e m e ' s i n c e p t i o n , o n e w a s t h e result of a m e r g e r of t w o of the o r i g i n a l A F P s , and t w o w e r e c r e a t e d in t h e s e c o n d half of the 1 9 8 0 s . In 1 9 9 2 t w o n e w A F P s e n t e r e d the m a r k e t , a n d o n e m o r e had b e e n a u t h o r i z e d . T w o A F P s are m a n a g e d b y u n i o n s / p r o f e s sional a s s o c i a t i o n s , and nine h a v e b e e n c o n t r o l l e d by the largest e c o n o m i c c o n g l o m e r a t e s t h a t g r e w in the 1 9 7 0 s d u r i n g t h e p r i v a t i z a t i o n p r o c e s s . D u r i n g the 1 9 8 2 c r i s i s t w o of t h e s e c o n g l o m e r a t e s w e n t b a n k r u p t , a n d t h e i r a s s e t s w e r e t e m p o r a r i l y a d m i n i s t e r e d by the s t a t e ; t h e y w e r e r e p r i v a t i z e d later a n d s o l d to f o r e i g n c o r p o r a t i o n s u n d e r the d e b t - e q u i t y s w a p p r o g r a m . C u r r e n t l y the f o u r largest A F P s are largely c o n t r o l l e d by f o r e i g n c o r p o r a t i o n s . T h e r e is a high d e g r e e of c o n c e n t r a t i o n in the A F P s : the largest three c o m b i n e d c o v e r e d 6 0 p e r c e n t of all the i n s u r e d in 1981, and this p r o p o r t i o n i n c r e a s e d to a l m o s t 6 8 p e r c e n t in 1991; the p r o p o r t i o n in the largest t w o d e c l i n e d f r o m 5 3 p e r c e n t to 5 0 p e r c e n t in the s a m e p e r i o d ( M e s a - L a g o 1988a, 1989c; S A F P 1992; C I E D E S S 1 9 9 2 ) . Data on t h e A F P s ' o p e r a t i o n a l c o s t s a r e f r a g m e n t a r y a n d c o n t r a d i c t o r y . O n e a n a l y s t e s t i m a t e s that the c o s t s per i n s u r e d in c o n s t a n t p e s o s w e r e halved f r o m 1 9 8 2 - 1 9 8 6 . A n o t h e r c l a i m s that in 1989, 2 5 p e r c e n t of t h e total r e v e n u e f r o m c o n t r i b u t i o n s w e n t to o p e r a t i o n a l c o s t s . In 1981 t h e r e w e r e 3 , 5 0 0 e m p l o y e e s in t h e p u b l i c s c h e m e , w h i c h w a s c o n s i d e r e d the s i n g l e largest p u b l i c i n s t i t u t i o n in C h i l e ; the n u m b e r of e m p l o y e e s in the private s c h e m e w a s 8 , 0 0 0 in 1990. T h e private s c h e m e n o w has 10 percent m o r e p e r s o n n e l than the p u b l i c s c h e m e had prior to t h e r e f o r m . A b o u t 3 0 p e r c e n t of A F P p e r s o n n e l are s a l e s p e o p l e (see b e l o w ) , and the s h a r e of p u b l i c i t y e x p e n d i t u r e s is very h i g h ; t h e s e t y p e s of e x p e n d i t u r e s w e r e not n e e d e d in the old s y s t e m . B e c a u s e of a lack of data a n d i n c o n s i s t e n t estim a t e s of the o v e r a l l n u m b e r of i n s u r e d a n d p e n s i o n e r s , it is p r a c t i c a l l y imp o s s i b l e to m e a s u r e a n d c o m p a r e e f f i c i e n c y in the t w o s c h e m e s , b u t o n e e x p e r t c o n c l u d e s that overall c o s t s of the entire s y s t e m are a l m o s t twice as high as b e f o r e b e c a u s e there are t w o s c h e m e s in o p e r a t i o n . D u r i n g m o s t of the 1980s the t h r e e A F P s w i t h the largest n u m b e r s of insured charged the highest fixed and percentage c o m m i s s i o n s , but by 1991 they h a d the l o w e s t p e r c e n t a g e c o m m i s s i o n s , a n d t w o of t h e m a l s o h a d the l o w e s t f i x e d c o m m i s s i o n s . F r o m 1 9 8 1 - 1 9 9 1 the a v e r a g e i n v e s t m e n t yield of t h o s e t h r e e A F P s w a s b e l o w t h e o v e r a l l a v e r a g e y i e l d . T h e r e f o r e , at least in the 1980s, t h e i n s u r e d ' s s e l e c t i o n s of A F P s w e r e not

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m a d e on t h e b a s i s of l o w e r c o m m i s s i o n s a n d h i g h e r y i e l d s ; h e n c e , c o m p e t i t i o n did not s e e m to b e w o r k i n g . T h e s e l e c t i o n s w e r e a p p a r e n t l y m a d e b a s e d on t h e t a c t i c s of s a l e s p e o p l e a n d t h e p u b l i c i t y d i s p l a y e d by t h e l a r g e s t A F P s . A l t h o u g h t h e r e is n o l i m i t o n t h e n u m b e r of t i m e s an ins u r e d can c h a n g e A F P s , in p r a c t i c e it can r e a s o n a b l y be d o n e three t i m e s a year a n d at n o cost to the i n s u r e d . In 1 9 9 0 , 17 p e r c e n t of all c o n t r i b u t o r s s h i f t e d A F P s , a n d 9 0 p e r c e n t of t h o s e c h a n g e s w e r e m a n a g e d by s a l e s p e o p l e w h o w o r k o n c o m m i s s i o n . T h e i n s u r e d — p a r t i c u l a r l y the e l d e r l y a n d f e m a l e s — u s u a l l y i g n o r e the d i f f e r e n c e s a m o n g A F P s in t e r m s of c o m m i s s i o n s a n d y i e l d s a n d s o a r e e a s y p r e y f o r the s a l e s p e o p l e . T h e c h a n g e is not a l w a y s b e n e f i c i a l . I n s u r a n c e c o m p a n y s a l e s p e r s o n n e l c a n also h a r m the i n s u r e d . I n f o r m a t i o n p r o v i d e d by the A F P s on c o m m i s s i o n s a n d y i e l d s w e r e p o o r until the e n d of t h e 1 9 8 0 s , w h e n such i n f o r m a t i o n b e c a m e m o r e w i d e l y a v a i l a b l e ; e . g . , t h e p e r c e n t a g e c o m m i s s i o n is n o w listed s e p a r a t e l y f r o m t h e i n s u r a n c e p r e m i u m , real i n s t e a d of n o m i n a l y i e l d s are p u b l i s h e d , a n d a s i m p l i f i e d e x p l a n a t i o n of the q u a r t e r l y r e p o r t is p r o v i d e d . But a very s u b s t a n t i a l a m o u n t of the A F P s ' c o s t s still g o e s to p u b l i c i t y a n d v e r y little or n o n e is u s e d to e d u c a t e the p u b l i c e f f e c t i v e l y on h o w to m a k e a w i s e d e c i s i o n b a s e d on t h e real a d v a n t a g e s of s p e c i f i c A F P s ( t h o u g h in 1987 the a s s o c i a t i o n of A F P s initiated e d u c a t i o n a l c a m p a i g n s ) ( M e s a - L a g o 1 9 8 8 a , 1 9 8 9 c ; I g l e s i a s a n d A c u ñ a 1991; C I E D E S S 1992). T h e s t a t e has e s t a b l i s h e d a s e r i e s of g u a r a n t e e s ( p a r t i c u l a r l y a f t e r the b a n k r u p t c i e s of 1 9 8 2 ) to m a k e t h e p r i v a t e s c h e m e as s o u n d as p o s s i b l e . T h e s e m e a s u r e s h a v e largely a c h i e v e d their g o a l , but a f e w of t h e m h a v e r a i s e d s i g n i f i c a n t b a r r i e r s that p r e v e n t t h e e n t r y of n e w A F P s . T h e m o s t important g u a r a n t e e s are (1) the S A F P regulates, supervises, and audits the p r i v a t e s c h e m e ; ( 2 ) A F P s c a n n e i t h e r be i n v o l v e d in any b u s i n e s s o t h e r than p e n s i o n s n o r o f f e r o t h e r b e n e f i t s ( e x c e p t f o r v o l u n t a r y s a v i n g s a c c o u n t s e r v i c e s a n d f u n e r a l g r a n t s ) ; ( 3 ) t h e p e n s i o n f u n d is s e p a r a t e d f r o m the A F P ' s o w n a s s e t s ; in c a s e of b a n k r u p t c y the S A F P m a n a g e s t h e f u n d until it is t r a n s f e r r e d to a n o t h e r A F P ; ( 4 ) e a c h A F P has to p r o v i d e an initial a m o u n t of c a p i t a l that v a r i e s d e p e n d i n g on its n u m b e r of ins u r e d : f r o m 5 , 0 0 0 U F f o r less than 5 , 0 0 0 i n s u r e d , to 2 0 , 0 0 0 U F for 1 0 , 0 0 0 or m o r e i n s u r e d (to f a c i l i t a t e e n t r y , the initial a m o u n t of capital has b e e n r e d u c e d , a n d t h e l a r g e s t A F P s h a v e b e e n a u t h o r i z e d to s u b c o n t r a c t s u c h s e r v i c e s as the c o l l e c t i o n of c o n t r i b u t i o n s , c h a r g e s to i n d i v i d u a l a c c o u n t s , and the i n v e s t m e n t of f u n d s to s m a l l e r A F P s ) ; ( 5 ) t h e A F P s are r e s p o n s i b l e f o r an a v e r a g e m o n t h l y y i e l d o v e r t h e last 12 m o n t h s of no less t h a n the lesser of the f o l l o w i n g : the a v e r a g e y i e l d of all f u n d s m i n u s t w o p e r c e n t a g e p o i n t s , or 5 0 p e r c e n t of t h e a v e r a g e y i e l d of all f u n d s ; ( 6 ) all A F P s m u s t e s t a b l i s h a " r e s e r v e of y i e l d f l u c t u a t i o n " to c o v e r any g a p in t h e r e q u i r e d y i e l d ; ( 7 ) in a d d i t i o n , a s e c o n d r e s e r v e ( e n c a j e ) e q u a l t o 1 p e r c e n t of t h e v a l u e of t h e p e n s i o n f u n d is r e q u i r e d ; 8 (8) if both r e s e r v e s are i n s u f f i c i e n t to m a t c h t h e r e q u i r e d m i n i m u m y i e l d the state is o b l i g e d

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to f i n a n c e the d i f f e r e n c e ; (9) 9 0 p e r c e n t of the i n v e s t m e n t i n s t r u m e n t s m u s t be d e p o s i t e d in the central b a n k ; (10) there are c e i l i n g s f i x e d to inv e s t m e n t s in each i n s t r u m e n t , a n d s h a r e s are o f f i c i a l l y c l a s s i f i e d a c c o r d ing to risks; and ( 1 1 ) the A F P must send quarterly reports of the individual a c c o u n t s to its a f f i l i a t e s and p r o v i d e t h e m with o t h e r s p e c i f i c i n f o r m a t i o n ( B u s t a m a n t e J e r a l d o 1991; M a r c e l a n d A r e n a s 1991; M a r g o z z i n i 1991).

Overall

Evaluation

T h e social security r e f o r m a n d the p r i v a t e p e n s i o n s c h e m e have b r o u g h t a d v a n t a g e s and d i s a d v a n t a g e s for the three m a j o r participants. T h e insured w o r k e r s h a v e b e n e f i t t e d f r o m lower payroll c o n t r i b u t i o n s , a h i g h e r level of b e n e f i t s ( s o far), f r e e d o m of c h o i c e c o n c e r n i n g A F P s a n d r e t i r e m e n t plans, the recognition of p r e v i o u s c o n t r i b u t i o n s , eligibility for a m i n i m u m p e n s i o n , a s o u n d e r p e n s i o n p r o g r a m with state g u a r a n t e e s , high i n v e s t ment yields, and faster and s i m p l e r p r o c e s s i n g of p e n s i o n s . D i s a d v a n t a g e s are the d e c l i n e in c o v e r a g e ( w h e n c o v e r a g e is e s t i m a t e d b a s e d on a c t i v e c o n t r i b u t o r s ) , the p a y m e n t of c o m m i s s i o n s to the A F P s , poor i n f o r m a t i o n c o n c e r n i n g what p e r c e n t a g e of c o n t r i b u t i o n s g o e s to c o m m i s s i o n s (at least until r e c e n t l y ) , r e s t r i c t i o n s a g a i n s t u s i n g the a c c u m u l a t e d f u n d until the t i m e of r e t i r e m e n t (e.g., to invest in a small b u s i n e s s , buy a house, etc.), lack of k n o w l e d g e on crucial issues and d e c i s i o n s , and the e l i m i n a t i o n of the e m p l o y e r ' s c o n t r i b u t i o n . T h e latter has b e e n a d v a n t a g e o u s for e m ployers, w h o s e only d i s a d v a n t a g e is the c o n s i d e r a b l e p a p e r w o r k involved in the m o n t h l y r e p o r t i n g and t r a n s f e r r i n g of their w o r k e r s ' c o n t r i b u t i o n s . T h e s t a t e s e e m s to h a v e m o s t l y d i s a d v a n t a g e s ( t h r o u g h s u b s i d i e s to the w h o l e s y s t e m ) and few a d v a n t a g e s , most of w h i c h are not clearly d e m o n strated; e.g., a v o i d a n c e of the p o t e n t i a l l y n e g a t i v e i m p a c t of an e m p l o y e r s ' payroll tax on e m p l o y m e n t , s o m e b e n e f i c i a l e f f e c t s on the capital m a r k e t ( a l t h o u g h not as m u c h as o r i g i n a l l y e x p e c t e d ) , a n d the e v e n t u a l t e r m i n a t i o n of the t r o u b l e s o m e p u b l i c s c h e m e . S o c i e t y as a w h o l e has profited f r o m the e l i m i n a t i o n of u n j u s t i f i e d costly privileges (although not all have been t e r m i n a t e d ) but will have to c o n f r o n t the heavy cost of state o b l i g a t i o n s in the f u t u r e . T h e o u t c o m e s of the s c h e m e s are e x t r e m e l y sensitive to the interest rate, level of c o m p l i a n c e , a n d general e c o n o m i c conditions. T h e state m a y be r e q u i r e d to meet v a r i o u s g u a r a n t e e s at o n c e , and s o m e risks m a y o c c u r s i m u l t a n e o u s l y , e.g., high u n e m p l o y m e n t and inflation c o m b i n e d with low real rates of return. T h e r e is no e v i d e n c e that the capitalization s y s t e m has g e n e r a t e d higher national s a v i n g s . T h e social security r e f o r m and the i n t r o d u c t i o n of the private p e n s i o n s c h e m e h a v e had t w o o p p o s i t e e f f e c t s on i n c o m e d i s t r i b u t i o n . P r o b a b l e p r o g r e s s i v e e f f e c t s are (1) the e l i m i n a t i o n of s e n i o r i t y p e n s i o n s a n d perseguidoras and the s t a n d a r d i z a t i o n of r e t i r e m e n t a g e s a n d p e n s i o n a d j u s t m e n t s ( w h i c h r e d u c e d p a y m e n t s to the r e l a t i v e l y h i g h - i n c o m e

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i n s u r e d ) ; ( 2 ) the i n t r o d u c t i o n o f the m i n i m u m p e n s i o n a n d e x p a n s i o n o f p u b l i c a s s i s t a n c e p e n s i o n s ( w h i c h h e l p the r e l a t i v e l y l o w - i n c o m e i n s u r e d a n d p o o r n o n i n s u r e d , r e s p e c t i v e l y , a l t h o u g h the l e v e l s a r e q u i t e l o w , part i c u l a r l y f o r the p u b l i c a s s i s t a n c e p e n s i o n ) ; a n d ( 3 ) a p o s s i b l e halt o f p r i c e t r a n s f e r s to n o n i n s u r e d c o n s u m e r s r e s u l t i n g f r o m the t e r m i n a t i o n o f the e m p l o y e r s ' c o n t r i b u t i o n (the e f f e c t s w o u l d b e d i f f e r e n t if there w a s a n e g a t i v e i m p a c t on e m p l o y m e n t or a t r a n s f e r o f c o s t s o n l y to w o r k e r s ) . P r o b able r e g r e s s i v e (or neutral) e f f e c t s are ( 1 ) a private pension s c h e m e b a s e d on a s t r i c t c o r r e s p o n d e n c e b e t w e e n p r e m i u m s a n d b e n e f i t s a n d a v i r t u a l e x c l u s i o n o f s o l i d a r i t y ; ( 2 ) d e c l i n e s in p o p u l a t i o n c o v e r a g e a n d no s i g n i f icant

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e m p l o y e d a n d other i n f o r m a l w o r k e r s ; ( 3 ) p r e s e r v a t i o n o f s o m e i n e q u a l i t i e s in e n t i t l e m e n t c o n d i t i o n s

a n d b e n e f i t s in the p u b l i c s c h e m e

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p a r t i c u l a r l y in the a r m e d f o r c e s s c h e m e s ; ( 4 ) l o w e r p e n s i o n s f o r w o m e n b e c a u s e of a lower a g e of retirement and longer life e x p e c t a n c y ; and (5) the r e g r e s s i v e i m p a c t o f the f i x e d c o m m i s s i o n . It h a s a l s o b e e n a r g u e d that the p r i v a t e s c h e m e f a v o r s h i g h - a n d l o w - i n c o m e i n s u r e d ( b e c a u s e o f prop o r t i o n a l l y h i g h e r i n v e s t m e n t y i e l d s on b e h a l f o f the f o r m e r a n d m i n i m u m p e n s i o n s f o r t h e l a t t e r ) , w h e r e a s it d i s c r i m i n a t e s a g a i n s t the m i d d l e - i n c o m e i n s u r e d ( t h r o u g h the r e g r e s s i v e e f f e c t o f the f i x e d c o m m i s s i o n ) . Prior to the 1 9 9 0 e l e c t i o n s the o p p o s i t i o n c a u t i o u s l y a c c e p t e d the s o c i a l s e c u r i t y r e f o r m a n d the p r i v a t e s c h e m e but w a s c r i t i c a l o f v a r i o u s a s p e c t s : the l a c k o f s o l i d a r i t y a n d p a r t i c i p a t i o n o f the i n s u r e d in the a d m i n i s t r a t i o n ; the p o o r c o v e r a g e o f i m p o r t a n t s e c t o r s o f the p o p u l a t i o n , s u c h a s the s e l f - e m p l o y e d ; the l o w m i n i m u m p e n s i o n s ; the r e g r e s s i v e n e s s o f the f i x e d c o m m i s s i o n ; the n e e d f o r m o r e A F P s ; the f o r e i g n o w n e r s h i p o f A F P s ; a n d the i n v e s t m e n t o f f u n d s in f o r e i g n i n s t r u m e n t s . T h e n e w d e m o c r a t i c g o v e r n m e n t h a s not i n t r o d u c e d a n y s u b s t a n t i a l c h a n g e s in the s y s t e m , but it h a s f o c u s e d on tax r e f o r m to i m p r o v e r e d i s t r i b u t i o n ; it h a s a l s o i n c r e a s e d m i n i m u m p e n s i o n s a n d is p l a n n i n g to e x t e n d p o p u l a t i o n coverage. S e v e r a l l e s s o n s c a n b e l e a r n e d f r o m the C h i l e a n e x p e r i e n c e . O n e is that the c o s t o f the t r a n s i t i o n m u s t b e v e r y c a r e f u l l y e v a l u a t e d . T h e m a i n t e n a n c e o f p a r t o f the o l d e n t i t l e m e n t , the r e c o g n i t i o n b o n d s , a n d the m i n i m u m p e n s i o n s a r e h u m a n e e l e m e n t s o f the r e f o r m , but they are e x t r e m e l y c o s t l y ; h e n c e , they m u s t b e b a l a n c e d w i t h an a c c u r a t e a s s e s s m e n t o f the f u t u r e b u r d e n o n s o c i e t y a n d the c o s t s o f a l t e r n a t i v e p u b l i c p r o g r a m s f o r l o w e r - i n c o m e g r o u p s . A n o t h e r l e s s o n is that the p r e s e n c e o f a m a r k e t a n d p r i v a t e a d m i n i s t r a t o r s d o e s not n e c e s s a r i l y e n s u r e c o m p e t i t i o n , c o n t r o l evasion and payment delays, and p r o m o t e other efficiency i m p r o v e m e n t s . H u g e c o l l e c t i v e s a v i n g s h a v e not l e d to a c o r r e s p o n d i n g e x p a n s i o n o f the d o m e s t i c c a p i t a l m a r k e t , e i t h e r . F i n a l l y , the e x c l u s i o n o f p a r t o f the p o p u l a t i o n ( e . g . , the a r m e d f o r c e s ) f r o m the r e f o r m a n d the m a i n t e n a n c e o f its privileged entitlement conditions and benefits, though perhaps initially

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u n a v o i d a b l e f o r p o l i t i c a l r e a s o n s , c a n e v e n t u a l l y b e c o m e a s a l i e n t ine q u a l i t y that m u s t be e r a d i c a t e d ( M e s a - L a g o 1 9 8 9 c ; C a s t r o J i m é n e z 1990; B o r z u t z k y 1991; M a r c e l a n d A r e n a s 1991; G i l l i o n a n d B o n i l l a 1992).

Peru: Moving Closer to the Chilean Model T h e social s e c u r i t y s y s t e m of P e r u is a d m i n i s t e r e d by the P e r u v i a n institute of social s e c u r i t y ( I P S S ) . Its p e n s i o n f u n d has s u f f e r e d a d r a m a t i c dec a p i t a l i z a t i o n in real t e r m s ( p a r t i c u l a r l y in the 1 9 8 0 s ) b e c a u s e of n e g a t i v e real i n v e s t m e n t y i e l d s ( f r o m -21 p e r c e n t to - 2 9 p e r c e n t f r o m 1 9 8 1 - 1 9 8 7 ) ; a significant state debt (U.S. $194 million, which virtually vanished bec a u s e of v e r y h i g h i n f l a t i o n r a t e s a n d a lack of d e b t i n d e x a t i o n ) ; c o n s i d erable employers' evasion and payment delays (33 percent for evasion a l o n e ) ; and h u g e a d m i n i s t r a t i v e c o s t s ( 5 2 p e r c e n t of total e x p e n d i t u r e s in 1986, l a r g e l y b e c a u s e of a d j u s t m e n t of p e r s o n n e l s a l a r i e s to i n f l a t i o n ) . A d d i t i o n a l p r o b l e m s are low p o p u l a t i o n c o v e r a g e ( o n e - t h i r d of the labor f o r c e and o n e - f i f t h of the p o p u l a t i o n ) , a s h a r p d e c l i n e in the real v a l u e of p e n s i o n s , e x c e s s i v e l y l o n g a n d b u r e a u c r a t i c p r o c e d u r e s to s o l i c i t t h e s e p e n s i o n s , a lack of a c t u a r i a l s t u d i e s f o r a l o n g p e r i o d , a n d o v e r a l l i n e f f i c i e n c y and w a s t e . O b v i o u s l y t h e r e w a s a n e e d f o r r e f o r m , b u t the d e b a t e f o c u s e d on the p r o p e r t y p e : i m p r o v e m e n t of the p u b l i c s c h e m e , p r i v a t i z a t i o n , or a m i x e d a p p r o a c h . I m p o r t a n t d i f f e r e n c e s b e t w e e n the P e r u v i a n s y s t e m and that of Chile prior to their r e f o r m s w e r e that Peru had o n e central social i n s u r a n c e a g e n c y ( i n s t e a d of multiple f u n d s ) , c o n s i d e r a b l y l o w e r p o p u l a t i o n c o v e r a g e , and a w o r s e f i n a n c i a l a n d a d m i n i s t r a t i v e s i t u a t i o n ( M e s a - L a g o 1989c, 1990, 1991a, 1991b, 1992c; M a r c o s R u e d a 1992). In N o v e m b e r 1 9 9 1 — w i t h i n t h e g e n e r a l e c o n o m i c f r a m e w o r k of an a d j u s t m e n t a n d r e s t r u c t u r i n g p r o g r a m — a d e c r e e - l a w w a s e n a c t e d by t h e e x e c u t i v e that i n t r o d u c e d a p r i v a t e p e n s i o n s c h e m e a l m o s t i d e n t i c a l to C h i l e ' s . It w a s s c h e d u l e d to b e g i n o p e r a t i o n on J u l y 28, 1992, a n d alt h o u g h its title r e f e r r e d to " s u p p l e m e n t a r y p r i v a t e p e n s i o n s , " it w a s really an a l t e r n a t i v e to t h e p u b l i c p e n s i o n s c h e m e b e c a u s e t h e i n s u r e d in that s c h e m e c o u l d f r e e l y t r a n s f e r to A F P s that w o u l d p r o v i d e b e t t e r c o n d i t i o n s a n d b e n e f i t s t h a n the I P S S . H o w e v e r , there w e r e s o m e d i f f e r e n c e s w i t h res p e c t to the C h i l e a n m o d e l : ( 1 ) b e c a u s e of c o n s t i t u t i o n a l r e g u l a t i o n s the p u b l i c s c h e m e in P e r u ( t h r o u g h t h e I P S S ) c o u l d not be t e r m i n a t e d , so the law g r a n t e d all w o r k e r s ( i n c l u d i n g f u t u r e p a r t i c i p a n t s ) t h e right to c h o o s e a f f i l i a t i o n in t h e p u b l i c or p r i v a t e s c h e m e s ; ( 2 ) e n t i t l e m e n t c o n d i t i o n s in t h e p u b l i c s c h e m e r e m a i n e d u n c h a n g e d , a n d t h e y a r e m o r e liberal than in t h e p r i v a t e s c h e m e (e.g., 6 0 / 5 5 v e r s u s 6 5 / 6 0 f o r m a l e / f e m a l e a g e s of ret i r e m e n t ) ; ( 3 ) t h e r e w a s n o m i n i m u m p e n s i o n g u a r a n t e e d by t h e s t a t e in t h e d e c r e e - l a w ; ( 4 ) the e m p l o y e r ' s c o n t r i b u t i o n w a s to b e r e d u c e d f r o m 6 p e r c e n t to 1 p e r c e n t , a n d t h e i n s u r e d ' s w a s to be i n c r e a s e d f r o m 3 p e r c e n t

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to 8 p e r c e n t ( p l u s a d d i t i o n a l v o l u n t a r y c o n t r i b u t i o n s a n d c o m m i s s i o n s ) ; o v e r a l l c o n t r i b u t i o n s in t h e p u b l i c s c h e m e w e r e a p p a r e n t l y not c h a n g e d ; and ( 5 ) b a s e d on the solidarity p r i n c i p l e the entire e m p l o y e r ' s c o n t r i b u t i o n a n d part of t h e i n s u r e d ' s w a s to b e t r a n s f e r r e d to the p u b l i c s c h e m e ( " C r é a s e el S i s t e m a . . ." 1991; M a r c o s R u e d a 1992). I n c e n t i v e s p r o v i d e d to m o v e to the p r i v a t e s c h e m e w e r e the f i n a n c i a l crisis f a c e d by the p u b lic s c h e m e , t h e p o t e n t i a l f o r a f i n a n c i a l l y s o u n d e r p r i v a t e s c h e m e w i t h h i g h e r p e n s i o n s , a n d t h e l o w e r c o n t r i b u t i o n s c h a r g e d to e m p l o y e r s ( w h o c o u l d try to i n f l u e n c e their e m p l o y e e s to m o v e ) . I n c e n t i v e s to stay in the p u b l i c s c h e m e w e r e s i g n i f i c a n t l y l o w e r c o n t r i b u t i o n s f o r the i n s u r e d and m o r e liberal e n t i t l e m e n t c o n d i t i o n s . T h e 1 9 9 2 c o u p led by P r e s i d e n t F u j i m o r e a n d the s u s p e n s i o n of the political c o n s t i t u t i o n p a v e d the w a y to m o v e the P e r u v i a n p e n s i o n r e f o r m c l o s e r to its C h i l e a n c o u n t e r p a r t . A d r a f t of a new d e c r e e - l a w a n d its regu l a t i o n s , p u b l i s h e d in the o f f i c i a l g a z e t t e on J u l y 16, 1992, a b r o g a t e d the 1991 d e c r e e - l a w (just b e f o r e it w a s to b e e n f o r c e d ) and i n t r o d u c e d s o m e c h a n g e s . I n c l u s i o n in the p r i v a t e s c h e m e ( A F P s ) w a s to b e c o m e m a n d a tory to all t h o s e not p r e v i o u s l y i n s u r e d in the I P S S , w h o r e t a i n e d the right to m o v e to t h e p r i v a t e s y s t e m . All n e w e n t r a n t s into the l a b o r f o r c e or t h o s e w h o lost a f f i l i a t i o n w i t h t h e I P S S h a d to e n t e r the p r i v a t e s c h e m e ; t h e r e f o r e , as in the C h i l e a n c a s e , t h e p u b l i c s c h e m e w a s to be c l o s e d ( A n t e p r o y e c t o . . ." 1 9 9 2 ) . But the f i n a l law, e n a c t e d in D e c e m b e r 1 9 9 2 , s h i f t e d a g a i n to the m o d e l of t h e 1991 l a w . T h o s e i n s u r e d in the I P S S h a v e t h e r i g h t to stay in or m o v e to t h e p r i v a t e s c h e m e ; if they s w i t c h , they still c a n return to the I P S S w i t h i n a t w o - y e a r p e r i o d a f t e r the e n a c t m e n t of the l a w . If they stay in the I P S S , their c o n t r i b u t i o n s and t h o s e of their e m p l o y e r s r e m a i n u n c h a n g e d , a n d the i n s u r e d retain all rights u n d e r the p u b l i c s c h e m e . A f f i l i a t i o n to the p r i v a t e s c h e m e is v o l u n t a r y f o r n e w e n t r a n t s i n t o t h e l a b o r f o r c e , w h o c a n c h o o s e to e n t e r e i t h e r the p u b l i c s c h e m e or an A F P . T h e r e f o r e the p u b l i c s c h e m e is not c l o s e d . A s u m m a r y of the n e w f e a t u r e s of the p r i v a t e s c h e m e u n d e r the 1 9 9 2 law f o l l o w s . C o n t r i b u t i o n s of the i n s u r e d h a v e been f u r t h e r increased to m a k e t h e m e q u a l to the C h i l e a n m o d e l : a m a n d a t o r y 10 p e r c e n t f o r o l d - a g e p e n s i o n s p l u s a n o t h e r c o n t r i b u t i o n ( f r e e l y set by the A F P s ) f o r d i s a b i l i t y a n d surv i v o r s , as well as a v o l u n t a r y a d d i t i o n a l c o n t r i b u t i o n f o r t h e o l d - a g e p e n sion with a m a x i m u m of 2 0 p e r c e n t ( t w i c e that of C h i l e ) . In a d d i t i o n , there is a c o m p u l s o r y 1 p e r c e n t c o n t r i b u t i o n by t h e i n s u r e d ( f o r m e r l y i m p o s e d o n t h e e m p l o y e r by t h e 1 9 9 1 d e c r e e - l a w ) to b e t r a n s f e r r e d — a s part of a solidarity a p p r o a c h — t o the I P S S to d e f r a y the cost of p u b l i c a s s i s t a n c e to the d i s a b l e d a n d e l d e r l y w h o are d e s t i t u t e . T h e r e f o r e the i n s u r e d c o n t r i b u tion is p r o b a b l y h i g h e r than in C h i l e . M a n d a t o r y c o n t r i b u t i o n s f o r e m p l o y ers h a v e b e e n e l i m i n a t e d , a n d o n l y v o l u n t a r y o n e s are left. A s in the c a s e of C h i l e , s a l a r i e s of t h e i n s u r e d w h o m o v e f r o m the p u b l i c s c h e m e to the p r i v a t e o n e a r e to be i n c r e a s e d by 10 p e r c e n t ( r e p r e s e n t i n g a transferral of the e l i m i n a t e d e m p l o y e r ' s c o n t r i b u t i o n ) , then by a n o t h e r 3 p e r c e n t .

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There are a few d i f f e r e n c e s with the Chilean model. A m a x i m u m of 60,000 new soles is placed on the recognition bond, a ceiling that does not exist in Chile (at the end of 1992 the ceiling w a s equal to U.S. $40,000, which was quite high for Peru, but the new sol was declining). The bond is indexed for inflation but does not earn interest. It is granted only to those registered in the IPSS w h o had six m o n t h s of contributions i m m e diately before the enactment of the law plus a m i n i m u m of four years of contributions in the last 10 years; the n u m b e r of years a c c o u n t e d for by the bond increases with the age of the insured up to a m a x i m u m of 19 years. The minimum capital needed for an A F P to enter the market is only 5 0 0 , 0 0 0 soles (equal to U.S. $ 4 0 0 , 0 0 0 at the end of 1 9 9 2 ) — c o m p a r e d with a theoretical minimum of U.S. $ 1 0 0 , 0 0 0 in C h i l e — b u t no less than U.S. $2 million in practice. Finally, the m a x i m u m allowable investment percentages for particular instruments also differ, e.g., 60 percent for state securities (compared with 45 percent in Chile) and 5 percent in foreign instruments (versus 10 percent in Chile) ("Sistema Privado . . ." 1992). Incentives to m o v e to the new system are now g r e a t e r : not only w o u l d the insured get a substantial salary increase, but e m p l o y e r s put pressure on their e m p l o y e e s to shift in order to take a d v a n t a g e of lower contributions. (If the insured move to the private s c h e m e and then return to the IPSS, all salary i n c r e m e n t s are e l i m i n a t e d . ) T h e r e is also a gove r n m e n t - s p o n s o r e d c a m p a i g n e n c o u r a g i n g p e o p l e to m o v e to the A F P and help m i n i m i z e the role of the IPSS. T h e I P S S ' s f i n a n c i a l situation has worsened: there are 3 0 0 , 0 0 0 pensioners w h o are expected to be paid a total of U.S. $35 million monthly in pensions, but it is not clear where the money will c o m e f r o m . P r o c e d u r e s for starting new p e n s i o n s have been halted, there is no attempt to control c o m p l i a n c e , and the personnel are being pressured to resign ( L ó p e z G o n z á l e z and C é s p e d e s Garay 1992). A new office of pension standardization that began to function in January 1993 has a b s o r b e d the IPSS pension s c h e m e . U n d e r these c o n ditions an o v e r w h e l m i n g majority of those insured by the IPSS will likely move into the new system. The new Peruvian model reduces the cost of the transition by eliminating the m i n i m u m pension and placing limits (and not paying interest) on the recognition b o n d s . But Peru has a l w a y s been b e l o w the Chilean level of d e v e l o p m e n t , and P e r u ' s e c o n o m y is currently in chaos ( c o m pared with the Chilean economic boom of 1980). Furthermore, population coverage in Chile prior to the r e f o r m a p p r o x i m a t e d universality, but in Peru more than two-thirds of the labor force is not insured and about half is informal (in addition, there is a very large population of peasants outside the national market); hence, expansion of coverage will be extremely difficult. Finally, in a country with much more poverty and more lowerincome groups than Chile, a state c o m m i t m e n t to subsidize the transition (even if at somewhat lower costs) would deplete resources f r o m basic services for those most in need.

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Colombia: Mixed or Private Scheme? At the b e g i n n i n g of the 1990s there w a s a general c o n s e n s u s in C o l o m b i a that the social security s y s t e m w a s f a c i n g a crisis and n e e d e d a drastic ref o r m . T h e n e w c o n s t i t u t i o n of 1991 r a t i f i e d the state r e s p o n s i b i l i t y a n d g u i d i n g role in social security but a l l o w e d the private sector to participate as a p r o v i d e r of b e n e f i t s . A lively d e b a t e has e n s u e d on the roles of the state and the private sector, but by N o v e m b e r 1991 c o n c r e t e r e f o r m s had not been i n t r o d u c e d yet.

The Social Security

Crisis

C o l o m b i a ' s social security s y s t e m is o n e of the most f r a g m e n t e d in L A C . In 1990 there w e r e 1,040 institutions: 12 at the national level, f o u r m a n a g e d by u n i v e r s i t i e s , a n d 1,024 m a n a g e d by d e p a r t m e n t s , districts, a n d m u n i c i p a l i t i e s . O n l y 2 0 . 9 p e r c e n t of the total p o p u l a t i o n w a s c o v e r e d , r a n k i n g C o l o m b i a thirteenth a m o n g all Latin A m e r i c a . A b o u t 7 0 p e r c e n t of those c o v e r e d are under the social i n s u r a n c e institute for private w o r k ers (ISS), and 5 percent are under the main social i n s u r a n c e institute c o v e r i n g civil s e r v a n t s ( C A J A N A L ) . P r a c t i c a l l y all t h o s e i n s u r e d are u r b a n s a l a r i e d w o r k e r s , but a b o u t half of t h o s e e x p e c t e d to be r e g i s t e r e d are e v a d e r s ; a n d the ISS has had d i f f i c u l t i e s in e x p a n d i n g c o v e r a g e b e y o n d the f o r m a l s e c t o r (only 14 p e r c e n t of all the m u n i c i p a l i t i e s of C o l o m b i a w e r e tied to the ISS in 1989). In 1988, 5 7 p e r c e n t of all u r b a n e m p l o y ment w a s c o m p o s e d of m i c r o e n t e r p r i s e s ( o w n e r s and e m p l o y e e s ) , i n f o r mal s e l f - e m p l o y e d , d o m e s t i c s e r v a n t s , and unpaid f a m i l y w o r k e r s . C o v e r age a m o n g the latter three g r o u p s w a s m i n i m a l : 8.3 p e r c e n t , 14.5 percent, and 8.2 percent, r e s p e c t i v e l y , and part of such c o v e r a g e w a s by private ins u r a n c e . L e g i s l a t i o n e n a c t e d in 1 9 8 8 - 1 9 8 9 o f f e r e d ISS c o v e r a g e to d o m e s t i c s e r v a n t s ( m a n d a t o r y ) a n d s e l f - e m p l o y e d ( v o l u n t a r y ) , but only a small fraction of both g r o u p s has registered, particularly a m o n g the latter. In 1990, 21 percent of the p o p u l a t i o n was c o v e r e d in t e r m s of health c a r e by social i n s u r a n c e a n d s i m i l a r institutions and 12 p e r c e n t by the private sector; the r e m a i n i n g 67 percent w a s legally under the c h a r g e of the p u b lic national health system ( S N S ) , but only 39 percent actually had access to it, thus leaving 27 percent of the p o p u l a t i o n u n p r o t e c t e d ( M e s a - L a g o a n d De Geyndt 1987; Lopez and T o b o n 1990; ISS 1990; J a i m e 1991). A l t h o u g h the total payroll c o n t r i b u t i o n s to the ISS are the ninth highest in Latin A m e r i c a , they are g r o s s l y i n s u f f i c i e n t to f i n a n c e the s y s t e m . ISS c o n t r i b u t i o n s r a n g e f r o m 1 5 . 5 - 2 0 . 5 percent, c o m p a r e d to 13 p e r c e n t in C A J A N A L a n d 5 - 2 0 p e r c e n t in o t h e r f u n d s . (In a d d i t i o n , there is a 4 p e r c e n t c o n t r i b u t i o n f o r f a m i l y a l l o w a n c e s . ) T h e l o w e s t r a t e s are in the public sector, w h e r e the insured d o not c o n t r i b u t e to either the pension or the health p r o g r a m ( b o t h of w h i c h are f i n a n c e d by the g o v e r n m e n t ) ; in

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1989 the state f i n a n c e d 6 7 p e r c e n t of C A J A N A L e x p e n d i t u r e s . E m p l o y e r e v a s i o n and p a y m e n t d e l a y s to the I S S w e r e e s t i m a t e d to b e U . S . $ 3 0 5 m i l l i o n in 1985, a n d the state d e b t (as an e m p l o y e r and a third p a r t y ) w a s U . S . $ 3 7 0 m i l l i o n in 1988. T h e p e r c e n t a g e of I S S a n n u a l r e v e n u e a l l o c a t e d to f i n a n c i a l i n v e s t m e n t s t e a d i l y d e c l i n e d f r o m 2 7 p e r c e n t to 7.3 p e r cent f r o m 1 9 7 5 - 1 9 8 9 , a n d the v a l u e of t h e r e s e r v e s in c o n s t a n t p e s o s dec r e a s e d by t w o - t h i r d s f r o m 1 9 7 5 - 1 9 8 5 ( I S S r e s e r v e s can b e i n v e s t e d o n l y in s t a t e i n s t r u m e n t s ) . Initially the total p a y r o l l c o n t r i b u t i o n f o r I S S p e n s i o n s w a s set at 6.5 p e r c e n t (3 p e r c e n t by the e m p l o y e r , 1.5 p e r c e n t the ins u r e d , a n d 1.5 p e r c e n t the state as a third p a r t y ) , but the state c o n t r i b u t i o n w a s later e l i m i n a t e d ; in 1985 the total c o n t r i b u t i o n w a s i n c r e a s e d to 6 . 5 p e r c e n t ( 4 . 3 3 p e r c e n t by the e m p l o y e r a n d 2 . 1 7 p e r c e n t by the i n s u r e d ) . T h e o r e t i c a l l y , the ISS is b a s e d on s c a l e d p r e m i u m s , but the n e c e s s a r y req u i r e d i n c r e a s e s in c o n t r i b u t i o n s w e r e not i m p l e m e n t e d ; t h u s , in p r a c t i c e it is on a p a y - a s - y o u - g o m e t h o d . T h e r e q u i r e d level of c o n t r i b u t i o n to put the s y s t e m b a c k on partial c a p i t a l i z a t i o n w o u l d be 18 p e r c e n t f o r 1 9 9 1 - 1 9 9 5 , r i s i n g to 21 p e r c e n t f o r 1 9 9 6 - 2 0 0 0 ; e v e n f i n a n c i n g the s y s t e m w i t h p a y - a s - y o u - g o w o u l d r e q u i r e an i n c r e a s e of the c u r r e n t 6 . 5 p e r c e n t c o n t r i b u t i o n to 8 p e r c e n t in the c u r r e n t f i v e - y e a r p e r i o d a n d to 10.7 perc e n t in the n e x t . T h e I S S ' s a c t u a r i a l d e f i c i t in 1 9 8 8 w a s e s t i m a t e d to b e U.S. $ 2 , 0 0 0 million, and the deficit w a s U.S. $ 1 , 1 3 8 million for C A J A N A L . T h e latter d o e s not h a v e r e s e r v e s or e v e n a f i n a n c i n g m e t h o d , a n d w i t h its g e n e r o u s b e n e f i t s a n d e n t i t l e m e n t c o n d i t i o n s it w o u l d r e q u i r e at least a t w o - f o l d i n c r e a s e in its c u r r e n t level of c o n t r i b u t i o n . T h e ISS d i d not c o n duct any f o r m a l a c t u a r i a l r e v i e w s in the 1980s, a l t h o u g h o n e w a s p l a n n e d f o r 1991 ( L ó p e z M o n t a ñ o et al. 1 9 9 1 b ; D N P 1 9 9 1 ; L ó p e z C a s t a ñ o a n d M a r t í n e z 1991). B e n e f i t s f o r the i n s u r e d in the p u b l i c s e c t o r ( p a r t i c u l a r l y s e l e c t e d civil s e r v a n t s , the j u d i c i a r y , c o n g r e s s i o n a l r e p r e s e n t a t i v e s , a n d t h e a r m e d f o r c e s ) are v e r y g e n e r o u s and e n t i t l e m e n t c o n d i t i o n s q u i t e liberal. T h e ret i r e m e n t age in C A J A N A L is 10 y e a r s l o w e r than in the I S S ( w h i c h is in turn quite l o w : 6 0 / 5 5 f o r m a l e s / f e m a l e s ) , a n d in s o m e o t h e r p u b l i c f u n d s r e t i r e m e n t is p o s s i b l e w i t h only 1 0 - 2 0 y e a r s of s e r v i c e r e g a r d l e s s of a g e . In 1 9 8 8 the a v e r a g e C A J A N A L p e n s i o n w a s 7 0 p e r c e n t h i g h e r than that in t h e ISS. T h e a n n u a l a l l o c a t i o n of h e a l t h e x p e n d i t u r e s p e r c a p i t a in 1 9 8 9 w a s also q u i t e u n e q u a l : U . S . $ 1 5 f o r t h e S N S , $ 6 6 f o r the ISS, a n d $ 1 3 4 f o r C A J A N A L . I h a v e n o t e d that t h e s t a t e h e a v i l y s u b s i d i z e s t h e latter ( M e s a - L a g o a n d D e G e y n d t 1 9 8 7 ; D e p a r t a m e n t o N a c i o n a l de P l a n i f i c a c i ó n 1990; J a i m e G o n z á l e z 1 9 9 1 ) . A d m i n i s t r a t i v e e x p e n d i t u r e s as a p e r c e n t a g e of total s o c i a l s e c u r i t y e x p e n d i t u r e s i n c r e a s e d f r o m 4 . 4 p e r c e n t to 42.2 percent f r o m 1 9 6 5 - 1 9 8 6 , ranking C o l o m b i a ' s percentage a m o n g the t h r e e h i g h e s t in L A C . O n e v i e w p o i n t a b o u t the crisis is that it can b e s o l v e d , w i t h i n the c u r rent social security s y s t e m , t h r o u g h a s e r i e s of r e f o r m s . A n o t h e r v i e w p o i n t ,

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h o w e v e r , is that the crisis c a n n o t be s o l v e d w i t h o u t the p a r t i c i p a t i o n of the private sector.

The Role of the Private

Sector in a New

System

T h e 1991 c o n s t i t u t i o n d e v o t e s t w o a r t i c l e s to the r e g u l a t i o n of s o c i a l security a n d health c a r e . A r t i c l e 4 8 s t a t e s that social s e c u r i t y is a p u b l i c serv i c e of a m a n d a t o r y n a t u r e ; to be p r o v i d e d u n d e r s t a t e d i r e c t i o n , c o o r d i n a t i o n , a n d c o n t r o l ; a n d a d h e r e n t to the p r i n c i p l e s of u n i v e r s a l i t y , s o l i d a r i t y , a n d e f f i c i e n c y . T h e s t a t e will g u a r a n t e e the r i g h t to social security to all i n h a b i t a n t s a n d , w i t h p r i v a t e p a r t i c i p a t i o n , p r o g r e s s i v e l y exp a n d p o p u l a t i o n c o v e r a g e of t h o s e s e r v i c e s d e t e r m i n e d by l a w . S o c i a l security c a n be p r o v i d e d by p u b l i c or p r i v a t e i n s t i t u t i o n s a c c o r d i n g to law. O t h e r articles g u a r a n t e e the right to social s e c u r i t y of v u l n e r a b l e g r o u p s of the p o p u l a t i o n s u c h as p r e g n a n t w o m e n , c h i l d r e n , s e n i o r c i t i z e n s , t h e disa b l e d , a n d i n d i g e n t s (the s t a t e ' s r e s p o n s i b i l i t y in this p r o t e c t i o n is s p e c i f ically m e n t i o n e d ) . A r t i c l e 4 7 s t a t e s that e n v i r o n m e n t a l s a n i t a t i o n a n d h e a l t h c a r e a r e p u b l i c s e r v i c e s u n d e r t h e c h a r g e of the s t a t e and g u a r a n t e e d to the e n t i r e p o p u l a t i o n . T h e state t a s k s are to o r g a n i z e , d i r e c t , a n d r e g u l a t e t h o s e serv i c e s a c c o r d i n g to the s a m e t h r e e p r i n c i p l e s of social s e c u r i t y m e n t i o n e d a b o v e . In a d d i t i o n , the state will set the p o l i c i e s f o r the p r o v i s i o n of health s e r v i c e s by p r i v a t e i n s t i t u t i o n s a n d will s u p e r v i s e a n d c o n t r o l t h e m . H e a l t h s e r v i c e s m u s t be d e c e n t r a l i z e d by l e v e l s of c a r e a n d with c o m m u nity p a r t i c i p a t i o n . B a s i c s e r v i c e s will be m a n d a t o r y a n d f r e e f o r all citiz e n s , a n d c h i l d r e n b e l o w o n e y e a r of a g e a r e e n t i t l e d to f r e e c a r e in all health i n s t i t u t i o n s that r e c e i v e s t a t e f u n d s . T h e n e w c o n s t i t u t i o n a l r u l e s c o n c e r n i n g the p r i v a t e s e c t o r h a v e led to a lively d e b a t e in C o l o m b i a n s o c i e t y , t h e e n a c t m e n t of l e g i s l a t i o n , a n d several p r o p o s a l s . T h i s issue is d i s c u s s e d in the f o l l o w i n g t w o s u b s e c t i o n s on health a n d p e n s i o n s . Private services in health care. Prior to the 1991 constitution there w a s a m o d est but g r o w i n g role of the private sector in the extension of coverage. For instance, 34 percent of the i n f o r m a l s e l f - e m p l o y e d w e r e protected by private health insurance, the i m p o r t a n c e of which (in relation to the total population covered by health care) increased f r o m 8.3 percent to 9 . 2 percent f r o m 1 9 8 4 - 1 9 8 8 . Under the i n f l u e n c e of the Costa Rican model the ISS also signed a g r e e m e n t s with c o o p e r a t i v e s f o r the provision of health-care services. A n d in 1990 the ISS contracted with private health services at an annual cost of U.S. $ 9 0 million, but reportedly the quality of these services w a s not better than those p r o v i d e d by the ISS. T o i m p r o v e that quality and e f f i c i e n c y the ISS must closely supervise and control the private providers ( L ó p e z Castaño and T o b ó n Bernal 1990; J a i m e G o n z á l e z 1991; L ó p e z M o n t a n o et al. 1991b).

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T h e S N S w a s r e o r g a n i z e d by a law e n a c t e d in 1 9 9 1 that e s t a b l i s h e d that the m i n i s t r y of health ( M H ) will r e g u l a t e the o p e r a t i o n of p r i v a t e c o r p o r a t i o n s , i n s t i t u t i o n s , a n d f o u n d a t i o n s that p r o v i d e h e a l t h s e r v i c e s a n d that can c o n t r a c t w i t h p u b l i c h e a l t h i n s t i t u t i o n s . For that p u r p o s e p r i v a t e o r g a n i z a t i o n s m u s t register a n d s u p p l y the r e q u i r e d d o c u m e n t a t i o n ; in add i t i o n , t h o s e r e c e i v i n g p u b l i c f u n d s in d e a l i n g s w i t h the 1SS, the M H , a n d the p u b l i c s e c t o r m u s t sign a c o n t r a c t a n d p r o v i d e a p l a n c o n c e r n i n g the use of s u c h f u n d s and the c o s t s a n d q u a l i t y of the s e r v i c e s to be s u p p l i e d . T h e law also authorizes association b e t w e e n public and private institut i o n s and the a l l o c a t i o n of p u b l i c r e s o u r c e s to t h e m . T h e ISS, the f a m i l y a l l o w a n c e s p r o g r a m , and s i m i l a r i n s t i t u t i o n s can c o n t r a c t w i t h p r i v a t e org a n i z a t i o n s to p r o v i d e health s e r v i c e s to the n o n i n s u r e d . F i n a l l y , the law i n t r o d u c e s s t i m u l i to e n c o u r a g e t h e f u n c t i o n a l i n t e g r a t i o n of h e a l t h s e r v i c e s , e.g., by g i v i n g priority to c o n t r a c t s w i t h p u b l i c i n s t i t u t i o n s , as well as g r a n t s , t r a i n i n g , m a i n t e n a n c e f u n c t i o n s , a n d g o v e r n m e n t p r o j e c t s ( C a s t e l b l a n c o de C a s t r o 1991). A r e c e n t d o c u m e n t r e v i e w s the p o t e n t i a l a l t e r n a t i v e s that the c o n s t i tution allows and, after discarding both the c o m p l e t e l y public and c o m pletely f r e e - m a r k e t e x t r e m e s as u n c o n s t i t u t i o n a l , i d e n t i f i e s t h r e e o p t i o n s : (1) m a n d a t o r y a f f i l i a t i o n to p r i v a t e i n s u r a n c e c o m b i n e d w i t h a s t a t e subsidy to protect t h e i n d i g e n t s (this o p t i o n is b a s i c a l l y v i e w e d as u n a c c e p t a b l e b e c a u s e of the lack of s o l i d a r i t y w i t h i n the p r i v a t e s e c t o r and a m o n g r i s k s a n d i n c o m e g r o u p s ) ; ( 2 ) m a n d a t o r y i n s u r a n c e p r o t e c t i o n f o r all w o r k e r s , to be p a i d f o r by their e m p l o y e r s (this a l t e r n a t i v e is c o n s i d e r e d n o n v i a b l e b e c a u s e the m a j o r i t y of t h e labor f o r c e is not s a l a r i e d ) ; a n d (3) compulsory social insurance health c o v e r a g e with private participation ( j u d g e d to be the m o s t v i a b l e o p t i o n ) . T h e latter w o u l d be b a s e d on a pool of all public health facilities and r e s o u r c e s ( f r o m the S N S , ISS, C A J A N A L , o t h e r f u n d s , f a m i l y a l l o w a n c e s , etc.) to e x p a n d h e a l t h - c a r e c o v e r a g e to the entire population. The integrated health system would be financed with c u r r e n t social i n s u r a n c e c o n t r i b u t i o n s f r o m e m p l o y e r s a n d the i n s u r e d , s t a t e g r a n t s to c o v e r the cost of p r o t e c t i n g the p o o r , a n d a t r a n s f e r of 25 p e r c e n t f r o m f a m i l y - a l l o w a n c e s r e v e n u e . T h e s y s t e m w o u l d p r o v i d e integral health s e r v i c e s at the t h r e e l e v e l s of c a r e , w i t h e m p h a s i s on the s e c o n d a r y and tertiary levels b e c a u s e they a r e c o n s i d e r e d the m o s t e x p e n s i v e ( a l t h o u g h it is a c k n o w l e d g e d that 8 0 p e r c e n t of c a r e is m e t at t h e p r i m a r y l e v e l ) . T h e r e s u l t i n g s y s t e m is e x p e c t e d to a v o i d a n y d e f i c i t , a l t h o u g h o n l y very e l e m e n t a r y f i n a n c i a l c a l c u l a t i o n s a r e p r o v i d e d in the d o c u m e n t . T h e a d m i n i s t r a t i o n w o u l d be d e c e n t r a l i z e d a n d p l a c e d u n d e r the c h a r g e of m u n i c i p a l h e a l t h f u n d s that r e c e i v e t h e r e v e n u e a n d c o n t r a c t w i t h p u b l i c and p r i v a t e i n s t i t u t i o n s and m e d i c a l p r o f e s s i o n a l s . T h e s e i n s t i t u t i o n s a n d i n d i v i d u a l s a r e e x p e c t e d to c o m p e t e a m o n g t h e m s e l v e s to r e d u c e c o s t s , w h e r e a s the c e n t r a l g o v e r n m e n t s e t s m i n i m u m s t a n d a r d s , i m p e d e s t h e f o r m a t i o n of o l i g o p o l i e s , a n d s u p e r v i s e s a n d c o n t r o l s t h e s y s t e m . T a r i f f s

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set by a n a t i o n a l a g e n c y w o u l d h a v e to b e a c c e p t e d by all p a r t i c i p a n t s . T h e p o p u l a t i o n c o v e r e d w o u l d be f r e e to select the p r o v i d e r s ( R e s t r e p o et al. 1 9 9 1 ) . Private pensions. T h e r e w e r e three d i f f e r e n t positions c o n c e r n i n g h o w to c o n d u c t the r e f o r m of the pension s c h e m e : (1) maintain the current public s c h e m e but with stricter entitlement c o n d i t i o n s and higher contributions; (2) d e v e l o p a m i x e d s c h e m e that c o m b i n e s a drastically r e f o r m e d public pension s c h e m e with a s u p p l e m e n t a r y s c h e m e , mostly of a private nature (voluntary or mandatory); and (3) entirely replace the public s c h e m e with a fully f u n d e d private one. T h e first p o s i t i o n a r g u e d that t h e a c t u a r i a l d e f i c i t s f a c e d by t h e I S S a n d C A J A N A L w e r e so h u g e t h a t the c r e a t i o n of a C h i l e a n - s t y l e f u l l y f u n d e d p r i v a t e p e n s i o n s c h e m e w a s i m p o s s i b l e . It w o u l d cost 3 0 p e r c e n t of p u b l i c e x p e n d i t u r e s f o r a b o u t 4 5 y e a r s to f i n a n c e t h r e e t h i n g s : ( 1 ) the o b l i g a t i o n s to the c u r r e n t p e n s i o n e r s ( p l u s t h o s e w h o had a c q u i r e d rights); ( 2 ) the g u a r a n t e e d t r a n s f e r of c o n t r i b u t i o n s ( p a i d in the past to the c u r r e n t p u b l i c s y s t e m ) to t h e n e w p r i v a t e s y s t e m ; a n d (3) the cost of a m i n i m u m p e n s i o n w i t h i n the n e w s y s t e m to t h o s e w h o d o not q u a l i f y f o r a f u l l p e n s i o n . F u r t h e r m o r e , e c o n o m i c a n d p o l i t i c a l d i f f e r e n c e s b e t w e e n C h i l e and C o l o m b i a w o u l d m a k e the a p p l i c a t i o n of t h e f o r m e r ' s m o d e l very d i f f i c u l t in the latter. C o l o m b i a has m a n y m o r e p o o r p e o p l e , i n f o r m a l w o r k e r s , a n d n o n i n s u r e d p e o p l e t h a n C h i l e , a n d a c c e s s by that m a r g i n a l p o p u l a t i o n to a p r i v a t e s c h e m e w o u l d be i m p o s s i b l e . In a d d i t i o n , p a s s i n g a C h i l e a n - s t y l e r e f o r m w o u l d be m u c h m o r e d i f f i c u l t p o l i t i c a l l y in C o l o m b i a . P r o p o n e n t s of t h i s p o s i t i o n t h e r e f o r e p r o p o s e d to s o l v e t h e c r i s i s w i t h i n the c u r r e n t social s e c u r i t y s y s t e m t h r o u g h a s e r i e s of r e f o r m s , such as: (1) u n i f i c a t i o n of t h e p r i v a t e and p u b l i c p e n s i o n f u n d s a n d s t a n d a r d i z a t i o n of e n t i t l e m e n t c o n d i t i o n s a n d b e n e f i t s ; ( 2 ) e x t e n s i o n of p o p u l a t i o n c o v e r a g e w i t h s t a t e s u p p o r t to f i n a n c e the i n c o r p o r a t i o n of u r b a n i n f o r m a l and rural s e c t o r s ; ( 3 ) a g r a d u a l i n c r e a s e in t h e a g e of r e t i r e m e n t f r o m 6 0 / 5 5 ( 5 5 f o r b o t h s e x e s in C A J A N A L ) to 6 5 / 6 0 , as well as i n c r e a s e in payroll c o n t r i b u t i o n s a n d the r e q u i r e d n u m b e r of w e e k s of c o n t r i b u t i o n , to put t h e s y s t e m on s o u n d f i n a n c i a l g r o u n d ( t h e s e c o n d i t i o n s s h o u l d be m a d e u n i f o r m a m o n g all c o v e r e d g r o u p s ) ; ( 4 ) a g g r e s s i v e p u r s u i t of p a y m e n t e v a d e r s a n d late payers through improved computerization, inspection, and prosecution t e c h n i q u e s ; ( 5 ) r e d u c t i o n of a d m i n i s t r a t i v e c o s t s with h i g h e r e f f i c i e n c y ; a n d (6) p e r i o d i c a c t u a r i a l s t u d i e s ( J a i m e G o n z á l e z 1991; L ó p e z M o n t a ñ o 1992a). T h e s e c o n d p o s i t i o n e n d o r s e d a m i x e d s c h e m e , a r g u i n g that total priv a t i z a t i o n w a s not a l l o w e d by t h e c o n s t i t u t i o n ( C á r d e n a s 1992). T h r e e alt e r n a t i v e p r o p o s a l s w e r e e l a b o r a t e d in 1 9 9 0 a n d 1991 by e x p e r t s : U l p i a n o A y a l a , H e r n a n d o Z u l u e t a ( t o g e t h e r w i t h F E D E S A R R O L L O ) , and an a c t u arial f i r m ( J L B A c t u a r i o s ) . All of t h e m a g r e e d that t h e c u r r e n t s c h e m e

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c o u l d not b e f i x e d on a f u l l y f u n d e d or p a r t i a l l y f u n d e d b a s i s b u t that it c o u l d be f i n a n c e d by a p a y - a s - y o u - g o a p p r o a c h p r o v i d e d that c u r r e n t e n titlement conditions were significantly tightened and contributions moderately i n c r e a s e d . All three p r o p o s a l s m a i n t a i n e d the c u r r e n t p e n s i o n e r s ' rights; provided a basic (reduced) pension for future pensioners ranging f r o m o n e - h a l f to t h r e e t i m e s the m i n i m u m legal s a l a r y ; a t t e m p t e d to red u c e costs by i n c r e a s i n g the r e t i r e m e n t a g e f o r f u t u r e p e n s i o n s f r o m 6 0 / 5 5 to 6 5 / 6 0 , as well as the n u m b e r of w e e k s of c o n t r i b u t i o n a n d the n u m b e r of y e a r s u s e d to c o m p u t e the b a s e s a l a r y ; a n d o f f e r e d a s u p p l e m e n t a r y pension program, mainly through private providers. T h e d i f f e r e n c e s b e t w e e n the t h r e e p r o p o s a l s w e r e as f o l l o w s : ( 1 ) o n l y J L B a r r a n g e d f o r a transitional p e r i o d a n d a g r a d u a l i n c r e a s e in the age of r e t i r e m e n t a n d o t h e r c o n d i t i o n s ; the o t h e r t w o p r o p o s a l s i n v o l v e d a b r u p t c h a n g e ; ( 2 ) A y a l a m a i n t a i n e d that the c u r r e n t p a y r o l l c o n t r i b u t i o n c o u l d f i n a n c e the o b l i g a t i o n s t o w a r d c u r r e n t p e n s i o n e r s , the r e f o r m e d b a s i c pensions, a n d the s u p p l e m e n t a r y p e n s i o n p r o g r a m ; the o t h e r t w o p r o p o s a l s req u i r e d an i n c r e a s e in payroll c o n t r i b u t i o n s (only to f i n a n c e the c u r r e n t a n d f u t u r e p e n s i o n s ) plus an a d d i t i o n a l payroll c o n t r i b u t i o n to f i n a n c e the s u p p l e m e n t a r y p e n s i o n s ; (3) A y a l a b e l i e v e d that s t a t e s u b s i d i e s w e r e not nece s s a r y , w h e r e a s the other t w o a g r e e d with that p r o p o s i t i o n f o r the ISS but not for p u b l i c f u n d s (they t h o u g h t the state s h o u l d h e l p f i n a n c e the d e f i c i t s of its o w n e m p l o y e e s ' p e n s i o n s ) ; ( 4 ) t h e r e w e r e d i f f e r e n t a r r a n g e m e n t s c o n c e r n i n g t h e m i n i m u m s a l a r i e s to be p a i d by the s u p p l e m e n t a r y p r o g r a m s and t h e i r c o m b i n a t i o n of c o m p u l s o r y a n d v o l u n t a r y c o m p o n e n t s ; a n d (5) all t h r e e p r o p o s a l s e n d o r s e d a p r i v a t e a d m i n i s t r a t i o n of the s u p p l e m e n t a r y p e n s i o n s c h e m e ( e x c e p t in the c a s e of J L B ' s c o m p u l s o r y v a r i ation). All t h r e e p r o p o s a l s r e c o m m e n d e d the i n c o r p o r a t i o n of p u b l i c p e n s i o n f u n d s w i t h i n the r e f o r m e d I S S s y s t e m b u t w i t h m u c h t i g h t e r e n t i t l e m e n t c o n d i t i o n s and i n c r e a s e d c o n t r i b u t i o n s p l u s e f f e c t i v e p a y m e n t of state s u b s i d i e s . T h e p r o p o s a l s were all e v a l u a t e d using a s i m u l a t i o n t e c h n i q u e , with the following results: Ayala's proposal was considered financially nonviable (the p r o p o s e d payroll c o n t r i b u t i o n s w e r e grossly i n s u f f i c i e n t to s u p p o r t the old and new p r o g r a m s ) , and it w a s politically n o n v i a b l e b e c a u s e of its s h a r p cut in the b a s i c p e n s i o n and its a b r u p t n a t u r e . Z u l u e t a ' s p r o p o s a l w a s thought to b e financially viable and m o r e politically v i a b l e than A y a l a ' s bec a u s e it p r o v i d e d f o r a much higher basic p e n s i o n . J L B ' s p r o p o s a l w a s c o n s i d e r e d to b e v i a b l e both financially and p o l i t i c a l l y — p o l i t i c a l l y b e c a u s e of the inclusion of a transition period and a r e a s o n a b l e b a s i c p e n s i o n . C o n t r i b u t i o n s to t h e f u l l y f u n d e d s u p p l e m e n t a r y p e n s i o n s w e r e e x p e c t e d to be h i g h , a l t h o u g h s p e c i f i c rates w e r e not p r o v i d e d ( e x c e p t f o r an i n s u f f i c i e n t o n e in A y a l a ' s proposal) ( L ó p e z a n d M a r t i n e z 1991; L ó p e z C a s t a ñ o 1992). T h e t h i r d position c o n t e n d e d that t h e s e c o n d p o s i t i o n (i.e., the m i x e d a p p r o a c h ) w o u l d retain the f l a w s of t h e p u b l i c s y s t e m , that the f i s c a l

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b u r d e n w o u l d c o n t i n u e , and that the s u p p l e m e n t a r y f u n d s w o u l d be very small and thus i n a d e q u a t e as a c h a n n e l for s a v i n g s and i n v e s t m e n t . T h u s a fully f u n d e d capitalization s c h e m e s h o u l d be d e v e l o p e d . A l t h o u g h s o m e p r o p o n e n t s of this a p p r o a c h said that it did not h a v e to be t a n t a m o u n t to privatization, most s u p p o r t e r s a d v o c a t e d the Chilean model. Interestingly, Z u l u e t a , w h o first e n d o r s e d the m i x e d a p p r o a c h , s w i t c h e d to the third position in 1992 (Zulueta 1992).

The Government

Chooses the Third Option:

Privatization

T h e s e c o n d position d e s c r i b e d a b o v e a p p e a r e d to be the most p o p u l a r in 1991 and was e v e n t u a l l y e n d o r s e d by the director of the ISS, but the neoc o n s e r v a t i v e g r o u p that s u p p o r t e d the p r i v a t i z a t i o n a p p r o a c h ( c o m p o s e d of i n d i v i d u a l s f r o m the ministry of f i n a n c e , the national p l a n n i n g d i r e c tion, a n d the bank of the r e p u b l i c ) g r e w s t r o n g e r a n d ultimately p r e v a i l e d . In the s p r i n g of 1992 President C é s a r Gaviria d e c i d e d to s e p a r a t e the ref o r m s for pensions and health care, and in S e p t e m b e r he s u b m i t t e d a legal d r a f t to the c o n g r e s s that b a s i c a l l y f o l l o w e d the Chilean pension r e f o r m m o d e l , an action that p r o m p t e d the resignation of the director of the ISS, w h o strongly criticized the legal d r a f t . T h e f e a t u r e s of the new system that d i v e r g e d f r o m those of Chile are d e s c r i b e d b e l o w . T h e draft c l o s e d the ISS and the p u b l i c - f u n d pension s c h e m e s a n d rep l a c e d t h e m with a new p r i v a t e p e n s i o n s c h e m e i n v o l v i n g p r o g r a m s k n o w n as S A F P s . All salaried w o r k e r s (in the private and public s e c t o r s ) e n t e r i n g the labor f o r c e for the first t i m e had m a n d a t o r y c o v e r a g e by the p r i v a t e s c h e m e ; v o l u n t a r y c o v e r a g e w a s o f f e r e d to n o n s a l a r i e d w o r k e r s . T h o s e i n s u r e d by the I S S a n d p u b l i c p e n s i o n f u n d s w h o w e r e y o u n g e r than 55 (for m a l e s ) or 5 0 ( f o r f e m a l e s ) were given the option to m o v e to the p r i v a t e s c h e m e . T h e i n s u r e d a b o v e t h o s e a g e s w e r e to r e m a i n in the old s c h e m e s unless they d e c i d e d to c o n t i n u e their c o n t r i b u t i o n s until a g e 65, in which case they had the o p t i o n to j o i n the new s c h e m e . The military and the police w e r e e x c l u d e d f r o m the new s y s t e m . T h e e n t i t l e m e n t conditions and b e n e f i t s of the ISS p r o g r a m w e r e substantially tightened, but the d r a f t introduced no c h a n g e s to C A J A N A L a n d other p u b l i c f u n d s except f o r i n t e g r a t i n g t h e m into a n e w f u n d f o r national p u b l i c p e n s i o n s . T h e old s c h e m e s w e r e p r o j e c t e d to be t e r m i n a t e d in about 4 0 years. T h e new private s c h e m e w a s to p r o v i d e p e n s i o n s for old age (directly under control of the S A F P s ) a n d d i s a b i l i t y / s u r v i v o r s ( u n d e r c o v e r a g e by private i n s u r a n c e c o m p a n i e s ) . T h e c o n d i t i o n s for old age in the draft w e r e 6 5 y e a r s of a g e f o r both s e x e s p l u s 3 0 y e a r s of c o n t r i b u t i o n (these w e r e t o u g h e r than the C h i l e a n s c h e m e , w h i c h r e q u i r e s five f e w e r years of age for w o m e n and 10 f e w e r years of c o n t r i b u t i o n for both sexes). A r e c o g n i tion b o n d w o u l d be paid by the state at time of r e t i r e m e n t to a c c o u n t for the y e a r s of c o n t r i b u t i o n to the old s y s t e m ; this b o n d w o u l d be i n d e x e d to inflation and w o u l d earn an u n d e t e r m i n e d interest rate; there w o u l d be

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a m i n i m u m pension guaranteed by the state for those w h o lacked the n e e d e d r e q u i r e m e n t s . I S S c o n d i t i o n s w e r e t o u g h e n e d : t h e a g e of r e t i r e ment was gradually increased over eight years from 60/55 (for males/fem a l e s ) to 6 5 f o r both s e x e s ; the n u m b e r of y e a r s of c o n t r i b u t i o n w a s e x p a n d e d f r o m 10 or 20 y e a r s to 3 0 y e a r s ; the s a l a r y b a s e , w h i c h u s e d to be the last t w o y e a r s , w a s i n c r e a s e d to 10 y e a r s a n d a d j u s t e d to i n f l a t i o n ; the m a x i m u m p e n s i o n w a s set e q u a l to t h e l e s s e r of 9 0 p e r c e n t of t h e ins u r e d ' s s a l a r y at the t i m e of r e t i r e m e n t or 15 t i m e s t h e m i n i m u m legal salary; and all p e n s i o n s w e r e to be a d j u s t e d to the cost of living. T h e privi l e g e d c o n d i t i o n s of p u b l i c f u n d s w e r e l e f t u n t o u c h e d by t h e d r a f t . T h e d r a f t a l s o i n t r o d u c e d a p u b l i c a s s i s t a n c e p e n s i o n (to start in 1 9 9 4 ) f o r those a g e 7 0 a n d a b o v e living u n d e r c o n d i t i o n s of e x t r e m e p o v e r t y , w h i c h p r o v i d e s u p to o n e - h a l f of t h e m i n i m u m - w a g e s a l a r y . T h e c o m b i n e d i n s u r e d / e m p l o y e r p a y r o l l f o r p e n s i o n s in t h e I S S w a s 6 . 5 p e r c e n t ( 4 . 3 p e r c e n t f r o m t h e e m p l o y e r a n d 2 . 2 p e r c e n t f r o m t h e ins u r e d ) but w a s less f o r p u b l i c f u n d s . T h i s c o n t r i b u t i o n w a s r a i s e d to 8 percent ( 5 . 3 p e r c e n t the e m p l o y e r a n d 2 . 7 p e r c e n t the i n s u r e d ) a f e w w e e k s b e f o r e the legal d r a f t w a s s u b m i t t e d to c o n g r e s s . T h e d r a f t e s t a b l i s h e d a u n i f o r m o v e r a l l c o n t r i b u t i o n of 13.5 p e r c e n t f o r b o t h the o l d s y s t e m (inc l u d i n g p r i v a t e and p u b l i c s e c t o r s ) a n d the n e w p r i v a t e s c h e m e : 10 p e r cent to be p a i d by the e m p l o y e r and 3 . 5 p e r c e n t by the i n s u r e d . In the n e w s c h e m e all t h e e m p l o y e r s ' c o n t r i b u t i o n s w o u l d g o to t h e i n s u r e d ' s indiv i d u a l a c c o u n t s f o r o l d - a g e p e n s i o n s ; a p o r t i o n of t h e i n s u r e d ' s c o n t r i b u tions w o u l d f i n a n c e the p r e m i u m s f o r d i s a b i l i t y / s u r v i v o r s i n s u r a n c e , w i t h the rest b e i n g r e t a i n e d by t h e S A F P s as a c o m m i s s i o n . C o n t r a r y to t h e C h i l e a n m o d e l , t h e r e f o r e , t h e C o l u m b i a n d r a f t did not e l i m i n a t e the e m p l o y e r ' s c o n t r i b u t i o n but i n c r e a s e d it by 1 3 2 p e r c e n t ; it d i d not r e d u c e the i n s u r e d ' s c o n t r i b u t i o n in t h e p r i v a t e s c h e m e b u t i n c r e a s e d it by 6 0 p e r c e n t . T h e state w a s to f i n a n c e the o p e r a t i o n a l d e f i c i t of t h e old s y s t e m ; the r e c o g n i t i o n b o n d s , t h e m i n i m u m p e n s i o n s , a n d o t h e r g u a r a n t e e s in t h e n e w s y s t e m ; a n d the p u b l i c a s s i s t a n c e p e n s i o n f o r the d i s p o s s e s s e d . T h e a d m i n i s t r a t i o n of the p r i v a t e p e n s i o n s c h e m e w a s to b e p e r f o r m e d by C h i l e a n - s t y l e S A F P s , i n c l u d i n g p r i v a t e f i d u c i a r y a n d s a v i n g s a s s o c i a t i o n s , as well as by p u b l i c f i n a n c i a l entities. In a d d i t i o n to the c o m m i s s i o n i n c l u d e d in t h e i n s u r e d ' s 3 . 5 p e r c e n t c o n t r i b u t i o n s , t h e S A F P c o u l d c h a r g e a p e r c e n t a g e c o m m i s s i o n . C h a n g e s to d i f f e r e n t S A F P s by the i n s u r e d w e r e limited to t w o per y e a r , p u b l i c i t y w a s to be r e g u l a t e d by t h e state, a n d a m a x i m u m of 4 5 p e r c e n t f o r S A F P i n v e s t m e n t in s t a t e s e c u r i ties w a s set ( M T S S 1992).

Criticism

of the Government

Proposal

T h e legal d r a f t b e c a m e the t a r g e t of c r i t i c i s m by s o m e m e m b e r s of t h e c o n g r e s s a n d s t a t e a g e n c i e s (e.g., t h e n a t i o n a l c o m p t r o l l e r ) as w e l l as r e s e a r c h i n s t i t u t i o n s a n d e x p e r t s . ( T h e f o l l o w i n g s u m m a r y is b a s e d o n

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C o n t r a l o r i a 1992; L o p e z C a s t a n o 1 9 9 2 ; L o p e z M o n t a n o 1 9 9 2 b ; O c a m p o 1992; R u i z L l a n o 1 9 9 2 ) . O n e legal q u e s t i o n c o n c e r n e d t h e d r a f t ' s a p p a r e n t lack of c o n c e r n f o r a n d e v e n v i o l a t i o n of the c o n s t i t u t i o n a l p r i n c i p l e s of u n i v e r s a l c o v e r a g e and s o l i d a r i t y . A n o t h e r i s s u e w a s that the r e f o r m s h o u l d be g l o b a l (by inc l u d i n g health c a r e ) , and not l i m i t e d s i m p l y to p e n s i o n s , b e c a u s e r e l a t i o n s h i p s b e t w e e n the t w o p r o g r a m s a l r e a d y e x i s t a n d there is a n e e d to a s s e s s the total c o s t of r e f o r m s . O n e e x p e r t c l a i m e d that the total p a y r o l l c o n t r i bution (combining pensions, health insurance, and employment injury) w o u l d b e as high as 25 p e r c e n t . C o l o m b i a w o u l d s w i t c h f r o m h a v i n g the ninth h i g h e s t p e r c e n t a g e c o n t r i b u t i o n in Latin A m e r i c a to the f i f t h , t h u s e q u a l i n g Chile; h o w e v e r , C h i l e r a n k s f o u r t h in p o p u l a t i o n c o v e r a g e w i t h i n the r e g i o n , w h e r e a s C o l o m b i a is r a n k e d t w e l f t h , a n d the i n c r e a s e in c o n t r i b u t i o n s w o u l d not i m p r o v e that s i t u a t i o n ( s e e b e l o w ) . A third g e n e r a l point w a s that the key i m p a c t of the g o v e r n m e n t p r o p o s a l w o u l d be the result of a t o u g h e n i n g of e n t i t l e m e n t c o n d i t i o n s a n d b e n e f i t s a n d a s u b s t a n tial raise in c o n t r i b u t i o n s , rather than an o u t c o m e of either i n s t i t u t i o n a l - or f i n a n c i a l - r e g i m e c h a n g e s ( s u c h as p r i v a t i z a t i o n or c a p i t a l i z a t i o n ) . M a i n t a i n i n g t h e I S S b u t w i t h the p r o p o s e d t o u g h e r c o n d i t i o n s w o u l d a c h i e v e similar results. T h e legal d r a f t i g n o r e d the u r g e n t n e e d to e x p a n d p o p u l a t i o n c o v e r a g e . In the c a s e of C h i l e s u c h c o v e r a g e p r i o r to the r e f o r m w a s a b o u t 75 p e r c e n t of the labor f o r c e , but in C o l o m b i a it is 3 0 p e r c e n t . F u r t h e r m o r e , the i n f o r m a l s e c t o r in C o l o m b i a is c o n s i d e r a b l y larger than in C h i l e ( C h i l e , w h i c h o f f e r s v o l u n t a r y c o v e r a g e f o r the s e l f - e m p l o y e d , as in C o l o m b i a , has been u n a b l e in the last 12 y e a r s to i n c o r p o r a t e that s e g m e n t of the p o p u l a t i o n to a s i g n i f i c a n t d e g r e e ) . F i n a l l y , C o l o m b i a has a p o v e r t y i n c i d e n c e of 4 0 p e r c e n t ( a b o u t half of C o l o m b i a ' s urban p o p u l a t i o n a g e 6 0 and o v e r d o e s not r e c e i v e any i n c o m e ) , w h e r e a s C h i l e ' s is c o n s i d e r a b l y l o w e r . T h e g o v e r n m e n t p r o p o s a l c l a i m e d that liberal e c o n o m i c p o l i c i e s w o u l d u l t i m a t e l y lead to the c o m p l e t e " f o r m a l i z a t i o n " of the labor f o r c e : as all w o r k e r s g o t s t a b l e s a l a r i e d j o b s they w o u l d b e c o m e i n c o r p o r a t e d into the p r i v a t e s c h e m e . E v e n if that o p t i m i s t i c s c e n a r i o w e r e f e a s i b l e it w o u l d t a k e a long t i m e to m a t e r i a l i z e . T h e p r o p o s e d r e f o r m w o u l d t h e r e f o r e c o n s o l i d a t e the p r o t e c t i o n of o n e - t h i r d of the p o p u l a t i o n (in m i d d l e a n d l o w e r h i g h - i n c o m e b r a c k e t s ) at t h e e x p e n s e of the m a j o r i t y w h o are c o n c e n t r a t e d in t h e l o w e s t i n c o m e b r a c k e t s . T h e r e are not e n o u g h res o u r c e s to b o t h c o n s o l i d a t e p r o t e c t i o n f o r t h o s e in h i g h e r b r a c k e t s a n d p r o v i d e c o v e r a g e f o r t h o s e in l o w e r b r a c k e t s . T h e lack of e q u i t y w a s a n o t h e r i m p o r t a n t i s s u e . T h e d r a f t i m p o s e s c o n s i d e r a b l e s a c r i f i c e s on t h o s e c u r r e n t l y c o v e r e d by t h e I S S , but c i v i l s e r v a n t s are a l l o w e d to k e e p their s p e c i a l b e n e f i t s . O n e of those p r i v i l e g e d g r o u p s i n c l u d e s c o n g r e s s i o n a l r e p r e s e n t a t i v e s ; the p r o p o s a l ' s c r e a t o r s d i d not dare restrict the r e p r e s e n t a t i v e s ' b e n e f i t s . In the new s c h e m e inequality

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b e t w e e n m a l e a n d f e m a l e p e n s i o n s ( a s e x p l a i n e d in t h e C h i l e a n c a s e ) s h o u l d persist until the a g e of r e t i r e m e n t b e c o m e s the s a m e , b u t b e c a u s e w o m e n live l o n g e r and u s u a l l y h a v e l o w e r r e t i r e m e n t a g e s , the d i f f e r e n c e w o u l d not be c o m p l e t e l y e l i m i n a t e d . A c c o r d i n g to data in the g o v e r n m e n t p r o p o s a l an a v e r a g e i n s u r e d with 3 0 y e a r s of c o n t r i b u t i o n ( a s s u m i n g a 4 p e r c e n t real i n t e r e s t r a t e — s e e b e l o w ) w o u l d h a v e a salary r e p l a c e m e n t rate of o n l y 41 p e r c e n t ( 5 4 percent w i t h a 5 p e r c e n t interest rate); to r e c e i v e 1 0 0 p e r c e n t r e p l a c e m e n t , 4 5 y e a r s of c o n t r i b u t i o n w o u l d be n e e d e d ( 4 0 y e a r s w i t h a 5 p e r c e n t r a t e ) . T h e s e c a l c u l a t i o n s a s s u m e full c o m p l i a n c e t h r o u g h o u t t h e w o r k i n g lives of the insured, but the ISS r e c o r d f o r c o m p l i a n c e is a b o u t 5 0 p e r c e n t ( b e c a u s e of l a b o r i n s t a b i l i t y , e v a s i o n , e t c . ) ; h e n c e , f e w of t h o s e i n s u r e d w o u l d actually a c c u m u l a t e the r e q u i r e d 3 0 y e a r s of c o n t r i b u t i o n . F u r t h e r m o r e , a b o u t 8 0 percent of the I S S - i n s u r e d earn a salary e q u a l to t w i c e the m i n i m u m w a g e or less. For t h e s e r e a s o n s a large m a j o r i t y of t h e i n s u r e d c o u l d e n d u p r e c e i v i n g a m i n i m u m p e n s i o n , and the cost of the s t a t e s u b sidy w o u l d i n c r e a s e . Finally, by i n c r e a s i n g the n u m b e r of salary y e a r s r e q u i r e d to c a l c u l a t e the p e n s i o n a m o u n t , the d r a f t a d d r e s s e d t h e i m p o r t a n t i s s u e of e a r l y und e r r e p o r t i n g . B e c a u s e the a m o u n t of a p e n s i o n u n d e r the ISS is b a s e d on the last t w o y e a r s ' s a l a r y , m a n y i n s u r e d u n d e r t e p o r t f o r m o s t of their w o r k i n g lives and then i n c r e a s e t h e i r c o n t r i b u t i o n s p r i o r to r e t i r e m e n t . C r i t i c s a r g u e , h o w e v e r , that this is t h e c a s e o n l y f o r m i d d l e - a n d h i g h i n c o m e i n s u r e d (a m i n o r i t y ) but not f o r l o w - i n c o m e i n s u r e d ( t h e m a j o r ity), w h o s e p a y m e n t s are usually b a s e d o n the m i n i m u m legal s a l a r y a n d so c a n n o t be u n d e r r e p o r t e d . M o s t c r i t i c i s m of the d r a f t f o c u s e d on its f i n a n c i a l f l a w s , e v e n if the critics had a c c e p t e d the r e v i s e d - d o w n w a r d f i g u r e s that the g o v e r n m e n t off e r e d f o r the cost of the r e f o r m . T h e i n c r e a s e in c o n t r i b u t i o n s to 13.5 perc e n t w o u l d a l l o w the ISS to be s e l f - f i n a n c e d , at least until 2 0 1 0 , a n d w o u l d leave a s u r p l u s to c o v e r part of t h e e n s u i n g d e f i c i t a f t e r that y e a r . T h i s e s t i m a t e , h o w e v e r , a s s u m e d that n o n e of t h o s e i n s u r e d by t h e I S S w o u l d m o v e to the private s c h e m e . But if the large m a j o r i t y i n d e e d m o v e d (as h a p p e n e d in Chile), s u c h a level of c o n t r i b u t i o n w o u l d be g r o s s l y ins u f f i c i e n t ( b e c a u s e the I S S w o u l d still h a v e the o l d a f f i l i a t e s b u t w o u l d lose y o u n g c o n t r i b u t o r s ) . H e n c e , e i t h e r t h e c o n t r i b u t i o n w o u l d h a v e to be i n c r e a s e d or the state w o u l d h a v e to pay the d i f f e r e n c e . T h e d r a f t tried to r e d u c e that p r o b l e m by b a n n i n g t h o s e c u r r e n t l y i n s u r e d w h o a r e a g e 5 5 / 5 0 a n d o v e r f r o m s w i t c h i n g to t h e p r i v a t e s c h e m e ( u n l e s s t h e y d e c i d e d to c o n t r i b u t e until they b e c a m e 6 5 ) , but t h e a b o v e p r o j e c t i o n a p p a r e n t l y already had t a k e n this m o d i f i c a t i o n into a c c o u n t . F u r t h e r m o r e , t h e f i n a n c i a l s i t u a t i o n in C A J A N A L ( a n d o t h e r p u b l i c p e n s i o n s ) is m u c h w o r s e : in 1993 the e s t i m a t e d level of c o n t r i b u t i o n n e e d e d to c o v e r e x p e n s e s is 21 p e r c e n t — w e l l a b o v e the p r e v i o u s l y p r o j e c t e d 1 3 . 5 p e r c e n t . T h u s t h e

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combined private-public system would start with a deficit because it would require a level of contribution of almost 14 percent in 1993, and this level would rise to 17.6 percent in 2000 and 31 percent in 2020. Estimates of the debt generated by the entire reform by 2025 ranged from 2 0 - 6 4 percent of GDP (depending on whether only some of the ISS-insured would move to the new scheme or whether some of those insured in the public funds would also move); only 8^45 percent of that debt would be financed by the private pension funds. In 1991 Colombia considered having 7.4 percent of GDP in central bank securities to be too high, but that figure would look small compared with the forecasted pension debt burden. The draft lacked a clear formula for calculating the recognition bonds (it had three different alternatives) and did not fix the interest rate; it was therefore impossible to calculate accurately the future cost of such bonds: estimates ranged from 8 . 5 - 4 6 . 5 percent of GDP in 2025 (Ocampo 1992; Lopez Montano 1992b). These rough projections of the costs of the entire system suggested that the 45 percent limit set in the draft for SAFP investment in central bank securities would be too low to finance the debt, particularly if a good portion of those insured in public funds moved to the new private scheme. Three different types of interest rates were considered in the draft, and there were important contradictions among them: the rate earned by the SAFPs, the rate to be fixed by the government for recognition bonds, and the rate the state would have to pay to get the resources needed to finance such bonds and other reform costs. If the overall interest rate happened to be low, the government would benefit (its cost would be lower), but the yields of the SAFPs would be harmed; in this case many insured would not meet the requirements for minimum pensions, thereby increasing the state subsidy. Conversely, if the interest rate happened to be high, the S A F P s ' gain would be the g o v e r n m e n t ' s loss, except for a lower cost of the minimum pension. The draft did not have consistent calculations based on the same rates. The real interest rates projected in the government proposal, which ranged from 5 - 8 percent, are considered to be too high. The purpose of such inflated figures might have been to project a higher salary-replacement rate, but, on the other hand, financing the debt would then be costlier. The average rate in Colombia from 1 9 5 1 - 1 9 9 2 was close to 4 percent (the draft improperly gave a value of 7.5 percent), and international real rates were 2 - 3 percent. With the opening of Colomb i a ' s economy domestic rates would have to decline in order to be competitive in the world market. How will the cost of the old system based on pay-as-you-go compare with that of the new system based on capitalization? The draft assumed that the latter would be smaller and that a growing surplus would be generated, thereby leading to a higher capital accumulation. However, the Chilean experience does not provide evidence that a capitalization scheme increases national savings. A Colombian expert argues that the costs of

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each system d e p e n d on the r e l a t i o n s h i p of the interest rate a n d e c o n o m i c g r o w t h : if both rates are equal, the costs are the s a m e ; if the interest rate is higher than the g r o w t h rate, a p a y - a s - y o u - g o m e t h o d w o u l d be costlier than c a p i t a l i z a t i o n ; a n d the o p p o s i t e w o u l d be true if the interest rate is l o w e r than the g r o w t h rate. He b e l i e v e s that a l o w e r interest rate is the most likely s c e n a r i o as C o l o m b i a ' s e c o n o m y b e c o m e s m o r e o p e n , and he a r g u e s that it is for that reason that U.S. a n d W e s t e r n E u r o p e a n p e n s i o n s c h e m e s are not fully f u n d e d . If they w e r e , the e n o r m o u s a c c u m u l a t i o n of f u n d s w o u l d be e x t r e m e l y d i f f i c u l t to invest ( L ó p e z C a s t a ñ o 1992). B e c a u s e of l i m i t a t i o n s in C o l o m b i a ' s d o m e s t i c capital m a r k e t ( m o r e so than in C h i l e ' s ) critics c o n t e n d that t h e r e w o u l d be e i t h e r (1) a very high p r o p o r t i o n of f u n d s invested in p u b l i c debt i n s t r u m e n t s (a risky tactic f o r the p r i v a t e s c h e m e , as e v e n t s in C h i l e in the early 1980s d e m o n s t r a t e d ) , (2) p r e s s u r e to allow the i n s u r e d to w i t h d r a w f u n d s f r o m the S A F P s (e.g., to buy h o m e s or f i n a n c e e d u c a t i o n as in S i n g a p o r e ) , or (3) a s i z a b l e portion of i n v e s t m e n t in f o r e i g n i n s t r u m e n t s ( a s is b e g i n n i n g to h a p p e n in C h i l e ) . Finally, there w e r e e c o n o m i c a n d political c o n c e r n s about the e n o r m o u s resources to be c o n t r o l l e d by a likely private o l i g o p oly of S A F P s , w h i c h w o u l d hold a substantial p u b l i c debt. The Fate of the Government

Proposal and New

Alternatives

M o u n t i n g criticism f o r c e d P r e s i d e n t C é s a r G a v i r i a in D e c e m b e r 1992 to w i t h d r a w his p r o p o s a l f r o m the c o n g r e s s . All parties a g r e e d to rewrite the draft; debate and resubmit it for c o n g r e s s i o n a l a p p r o v a l ; a m e n d it to c o v e r both pension a n d health-care r e f o r m ; and d i s c u s s it t h r o u g h an integrated c o m m i s s i o n of r e p r e s e n t a t i v e s f r o m g o v e r n m e n t , labor, a n d b u s i n e s s . In the b e s t - c a s e s c e n a r i o final approval of the revised d r a f t w a s not e x p e c t e d until m i d - 1 9 9 3 . In the m e a n t i m e new proposals have been d e v e l o p e d by c o n g r e s s i o n a l r e p r e s e n t a t i v e s and e x p e r t s . O n e p r o p o s a l b a s i c a l l y r e s u r r e c t s the m i x e d a p p r o a c h s u m m a r i z e d earlier but a l s o i n c o r p o r a t e s s o m e of the d r a f t elem e n t s : (1) the m e r g i n g of all p u b l i c f u n d s into a national f u n d that s h o u l d s t a n d a r d i z e e n t i t l e m e n t c o n d i t i o n s and b e n e f i t s to b r i n g t h e m in line with the t o u g h e r c o n d i t i o n s imposed on the ISS (the national f u n d w o u l d h a v e either public a c c o u n t s with i n v e s t m e n t in the f i n a n c i a l m a r k e t or s e p a r a t e f u n d s for each g r o u p under state s u p e r v i s i o n ) ; (2) the I S S w o u l d d e v e l o p a s e p a r a t e f u n d to m a n a g e the t r a n s i t i o n , a n d the p a y r o l l c o n t r i b u t i o n w o u l d be g r a d u a l l y increased (instead of b e i n g a b r u p t l y r a i s e d ) to f i n a n c e the m e a g e r b e n e f i t s ; and (3) a f u n d f o r the d i s p o s s e s s e d elderly w o u l d be e s t a b l i s h e d and f i n a n c e d by general t a x e s ( L ó p e z C a s t a ñ o 1992). A n o t h e r p r o p o s a l o f f e r s three a l t e r n a t i v e s , all of t h e m a r g u a b l y less e x p e n s i v e than the g o v e r n m e n t ' s ( s u c h s a v i n g s c o u l d then be used to f i n a n c e p u b l i c a s s i s t a n c e p e n s i o n s f o r the elderly or e x p a n d c o v e r a g e to

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the i n f o r m a l s e c t o r ) : ( 1 ) the first o p t i o n o u t l i n e d on p a g e 140 b u t w i t h a p o r t i o n of I S S r e s o u r c e s c h a n n e l e d to the p r i v a t e c a p i t a l m a r k e t ; ( 2 ) the m i x e d o p t i o n ( w h i c h I c o n s i d e r the b e s t ) ; and ( 3 ) a variant of t h e p r i v a t i zation o p t i o n but w i t h a n e w e l e m e n t of s o l i d a r i t y — a p o r t i o n of the c o n t r i b u t i o n s to the S A F P s w o u l d b e u s e d to p a r t l y f i n a n c e a b a s i c p e n s i o n f u n d ( O c a m p o 1992). A third p r o p o s a l i n t r o d u c e s t h e f o l l o w i n g m o d i f i c a t i o n s to the d r a f t : (1) f a c i l i t a t e t h e i n c o r p o r a t i o n of the i n f o r m a l s e c t o r by m a k i n g c o n t r i b u t i o n s m o r e f l e x i b l e ( e . g . , by a l l o w i n g i r r e g u l a r , n o n p e r i o d i c p a y m e n t s , s o m e of t h e m b e l o w the m i n i m u m c o n t r i b u t i o n ) and s e t t i n g a 10 p e r c e n t c o n t r i b u t i o n by the w o r k e r a n d 3 . 5 p e r c e n t by the state; (2) i n t r o d u c e solidarity e l e m e n t s , s u c h as the e l i m i n a t i o n of the salary c e i l i n g to c o n t r i b u tions, and use the extra r e v e n u e to s u p p o r t p e n s i o n s f o r l o w - i n c o m e w o r k ers; a n d ( 3 ) a u t h o r i z e c o o p e r a t i v e s a n d n o n p r o f i t o r g a n i z a t i o n s (e.g., f a m i l y - a l l o w a n c e f u n d s ) to o p e r a t e S A F P s in o r d e r to e x p a n d c o v e r a g e to low-income groups (Ruiz Llano 1992). T h e g o v e r n m e n t r e s u b m i t t e d t h e first legal d r a f t , with s o m e m o d i f i c a t i o n s , in 1 9 9 3 , a n d in J u n e it w a s a p p r o v e d by c o m m i s s i o n s of b o t h c h a m b e r s of c o n g r e s s , a l t h o u g h it still n e e d s full c o n g r e s s i o n a l a p p r o v a l . O n e i m p o r t a n t d i f f e r e n c e is that, a c c o r d i n g to the s e c o n d d r a f t , the r e f o r m e m b r a c e s b o t h h e a l t h - c a r e a n d p e n s i o n s , w h e r e a s the first d r a f t w a s l i m ited to the latter. T h e p e n s i o n c o m p o n e n t of the s e c o n d d r a f t b a s i c a l l y rep r o d u c e d the first d r a f t , that is, p r i v a t i z a t i o n C h i l e a n style, but with s o m e c h a n g e s either to r e s p o n d to c r i t i c i s m a g a i n s t the first d r a f t or to m a k e its p a s s a g e in c o n g r e s s e a s i e r . First, the c u t - o f f a g e , b e l o w w h i c h t h o s e already i n s u r e d h a v e the o p t i o n to m o v e to the n e w private s y s t e m , w a s red u c e d f r o m 5 0 / 5 5 f o r f e m a l e s / m a l e s to 4 0 / 4 5 . S e c o n d , w i t h i n the old s y s tem the first d r a f t w a s m o d i f i e d by the s e c o n d d r a f t as f o l l o w s : (1) a g e s of r e t i r e m e n t w e r e d e c r e a s e d f r o m 6 5 f o r both s e x e s to 5 7 / 6 2 , w h i c h is only t w o a d d i t i o n a l y e a r s o v e r the c u r r e n t s t a t u t o r y a g e s ; ( 3 ) t h e m i n i m u m n u m b e r of y e a r s of c o n t r i b u t i o n f o r r e t i r e m e n t w a s cut d o w n f r o m 3 0 to 2 0 (still t w i c e the n u m b e r c u r r e n t l y r e q u i r e d ) ; (4) the salary b a s e u s e d to c a l c u l a t e the p e n s i o n w a s i n c r e a s e d f r o m the last 10 y e a r s of w o r k to the entire a c t i v e life of the i n s u r e d ( c u r r e n t l y it is the last t w o y e a r s of w o r k ) ; ( 5 ) t h e total w a g e c o n t r i b u t i o n w a s i n i t i a l l y d e c r e a s e d 2.5 p e r c e n t a g e points ( f r o m 13.5 p e r c e n t to 11 p e r c e n t ) , but later on it w a s to be i n c r e a s e d b a c k u p to 13.5 p e r c e n t ; a n d (6) a solidarity p e n s i o n f u n d w a s c r e a t e d , fin a n c e d by an additional salary c o n t r i b u t i o n of 0.5 percent f r o m the h i g h e s t i n c o m e i n s u r e d , in o r d e r to f a c i l i t a t e t h e i n c o r p o r a t i o n of l o w - i n c o m e w o r k e r s ( a l l o w i n g f o r s o m e e x p a n s i o n of c o v e r a g e ) . T h e p r i v a t e s y s t e m w a s r e p r o d u c e d in the s e c o n d d r a f t as it w a s in the first d r a f t , e x c e p t that the b o n d of r e c o g n i t i o n e a r n e d a 5 p e r c e n t a n n u a l real rate of i n t e r e s t w h e r e a s such interest w a s u n s p e c i f i e d in the first d r a f t . ( B o t e r o 1 9 9 3 ) T h e c h a n g e s d e s c r i b e d a b o v e d i d not a v o i d a r e p e t i t i o n of t h e c r i t i c i s m a g a i n s t t h e f i r s t d r a f t . T h e s e c o n d d r a f t has b e e n s u b s t a n t i a l l y

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m o d i f i e d by c o n g r e s s , thus r e s u l t i n g in a third d r a f t that g o e s back to the m i x e d m o d e l : the p u b l i c s y s t e m ( c e n t e r e d on I S S ) is r e t a i n e d a n d c o m p e t e s with the private s y s t e m . ( D e t a i l s on the third d r a f t w e r e not a v a i l able at the t i m e this book w a s c o m p l e t e d . ) T h e senate a p p r o v e d the third d r a f t in N o v e m b e r , and the c h a m b e r of d e p u t i e s p a s s e d it into law in D e c e m b e r 1993.

Argentina: A Mixed Model The Situation

Prior to the

Reform

T o g e t h e r with U r u g u a y , A r g e n t i n a s u f f e r s the w o r s t f i n a n c i a l d i s e q u i l i b rium of p e n s i o n s c h e m e s in the r e g i o n . In the 1960s a n d 1 9 7 0 s m u l t i p l e p e n s i o n f u n d s w e r e u n i f i e d , relatively s t a n d a r d i z e d , and p l a c e d under the under secretary of social s e c u r i t y . H o w e v e r , an a d m i n i s t r a t i v e distinction a m o n g t h r e e b r a n c h e s or f u n d s has c o n t i n u e d : i n d u s t r y a n d c o m m e r c e ( s a l a r i e d p r i v a t e w o r k e r s ) , s t a t e (civil s e r v a n t s ) , a n d s e l f - e m p l o y e d . Financially, t h o u g h , there is a p o o l i n g of r e v e n u e s for all three. P o p u l a t i o n c o v e r a g e is almost universal, a l t h o u g h s o m e g r o u p s are not insured, such as the l o w e s t - i n c o m e s e l f - e m p l o y e d and s o m e rural t e m p o r a r y and s e a s o n a l w o r k e r s . A s the d e g r e e of i n f o r m a l i z a t i o n of the labor m a r k e t inc r e a s e s there could be a g r o w i n g n o n c o v e r e d sector, but the virtual lack of data on p o p u l a t i o n c o v e r a g e i m p e d e s any s e r i o u s a n a l y s i s . P e n s i o n b e n e f i t s h a v e b e e n e x c e s s i v e l y g e n e r o u s ; f o r i n s t a n c e , in spite of o n e of the highest life e x p e c t a n c i e s in the r e g i o n the overall age of r e t i r e m e n t is 6 0 for m a l e s a n d 5 5 for f e m a l e s . D i s a b i l i t y p e n s i o n s are easily g r a n t e d , and b e c a u s e of irregularities and a lack of control 3 0 percent of all p e n s i o n e r s under the legal a g e of retirement r e c e i v e them ( o n e f i f t h of all s e l f - e m p l o y e d p e n s i o n s are for d i s a b i l i t y ) . P r i v i l e g e d s p e c i a l p r o g r a m s (e.g., for the j u d i c i a r y , legislative b r a n c h , t o p e x e c u t i v e s ) a l l o w r e t i r e m e n t a f t e r a m i n i m u m n u m b e r of y e a r s of w o r k r e g a r d l e s s of a g e . A c c o r d i n g to law the p e n s i o n s h o u l d b e set at 7 0 - 8 2 p e r c e n t of the b a s e s a l a r y , w h i c h is c a l c u l a t e d as the a v e r a g e of the best three years of salary o u t of the 10 y e a r s p r i o r to r e t i r e m e n t , a n d p e n s i o n s s h o u l d be a d j u s t e d b a s e d on the a v e r a g e o v e r a l l salary a d j u s t m e n t . T h e s e u n r e a l i s t i c n o r m s w e r e u n a b l e to be m a i n t a i n e d in the long run (once the f i n a n c i a l deficit of the s y s t e m e x p a n d e d d r a m a t i c a l l y a n d inflation s k y r o c k e t e d ) , so the real level of p e n s i o n s d e c l i n e d by 25 p e r c e n t f r o m 1 9 8 1 - 1 9 8 8 a n d by a n o t h e r 3 0 p e r c e n t f r o m 1 9 8 8 - 1 9 9 1 . M o r e than 2 0 , 0 0 0 judicial c l a i m s h a v e been g r a n t e d to collect retroactively the d i f f e r e n c e b e t w e e n the pension actually p a i d and that legally e s t a b l i s h e d , a n d a n o t h e r 6 0 , 0 0 0 c l a i m s are p e n d i n g ; all of t h e s e , h o w e v e r , a c c o u n t f o r o n l y 4 p e r c e n t of the total n u m b e r of p e n s i o n e r s . In 1991 the g o v e r n m e n t a g r e e d to settle the debt to the p e n s i o n e r s f o r the p r e v i o u s 12 y e a r s at a c o s t of U.S. $ 7 billion (to be p a i d

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w i t h p u b l i c b o n d s ) , but s i n c e t h e n the d e b t has c o n t i n u e d to g r o w at a rate of U . S . $ 2 . 4 b i l l i o n per year. T h e r e are s i g n i f i c a n t i n e q u a l i t i e s in the s c h e m e . T h e p r i v i l e g e d p r o g r a m s , w h i c h c o v e r a tiny f r a c t i o n of 1 p e r c e n t of all p e n s i o n e r s , r e c e i v e 2 p e r c e n t of all e x p e n d i t u r e s ; a n d t h e state b r a n c h , w h i c h has 0 . 7 p e r c e n t of all p e n s i o n e r s , g e t s 6 p e r c e n t of total p e n s i o n e x p e n d i t u r e s . In t h e ind u s t r y / c o m m e r c e b r a n c h (the only o n e that g e n e r a t e s a s u r p l u s ) 8 0 p e r c e n t of p e n s i o n e r s g e t the m i n i m u m p e n s i o n , but in the s t a t e b r a n c h o n l y 5 3 p e r c e n t fall in that c a t e g o r y . S o m e i n s u r e d c o n t r i b u t e all their w o r k i n g lives, but o t h e r s ( p a r t i c u l a r l y the s e l f - e m p l o y e d ) u n d e r r e p o r t their i n c o m e in the e a r l y y e a r s a n d c o n c e n t r a t e t h e i r c o n t r i b u t i o n s on t h e last t h r e e years; t h u s both g r o u p s m a y e n d u p r e c e i v i n g the s a m e p e n s i o n a m o u n t s . M u l t i p l e b e n e f i t s that can legally b e r e c e i v e d b y o n e p e r s o n a c c o u n t f o r 12 p e r c e n t of total e x p e n d i t u r e s . G r a c e and n o n c o n t r i b u t o r y p e n s i o n s are paid to p o o r e l d e r l y p e o p l e , but m u c h b e t t e r o n e s g o to f o r m e r j u d g e s of the s u p r e m e c o u r t a n d c h u r c h d i g n i t a r i e s . In 1991 t h e r e w e r e 1 5 0 , 0 0 0 of t h e s e p e n s i o n s that c o s t a total of U . S . $ 1 6 m i l l i o n . In 1 9 9 1 a l a w w a s p a s s e d a b o l i s h i n g p r i v i l e g e d p r o g r a m s , but s o m e of them h a v e m a n a g e d to m a i n t a i n their p e r q u i s i t e s . S o c i a l s e c u r i t y e x p e n d i t u r e s in A r g e n t i n a e q u a l e d 9 p e r c e n t of G D P in 1 9 8 0 a n d an e s t i m a t e d 13 p e r c e n t in 1991; a b o u t 8 0 p e r c e n t of s u c h exp e n d i t u r e s g o e s to p e n s i o n s . T h e total w a g e tax f o r s o c i a l s e c u r i t y is 5 6 p e r c e n t (21 p e r c e n t f o r p e n s i o n s ) , the highest in the r e g i o n . S i n c e the m i d 1980s there h a v e a l s o b e e n t a x e s on g a s and p u b l i c utilities, but t h e s e reve n u e s a r e g r o s s l y i n s u f f i c i e n t to f i n a n c e the s y s t e m . T h e s t a t e t h e r e f o r e has to s u b s i d i z e 3 5 p e r c e n t of p e n s i o n e x p e n d i t u r e s , and that b u r d e n has been r a p i d l y i n c r e a s i n g . T h e i n d u s t r y / c o m m e r c e b r a n c h s u r p l u s is u s e d to c o v e r the e x p a n d i n g d e f i c i t of t h e s t a t e and s e l f - e m p l o y e d b r a n c h e s (the l a t t e r ' s r e v e n u e c o v e r s only 2 0 p e r c e n t of its e x p e n d i t u r e s ) . In a d d i t i o n to the a b o v e - m e n t i o n e d l a r g e s s e in b e n e f i t s the d e f i c i t has been c a u s e d by a g r a d u a l d e c l i n e in real r e v e n u e s r e s u l t i n g f r o m internal a n d e x t e r n a l f a c t o r s . T h e e m p l o y e r s ' c o n t r i b u t i o n w a s e l i m i n a t e d in 1 9 8 0 a n d r e p l a c e d w i t h a p r o p o r t i o n of V A T ( v a l u e - a d d e d t a x ) r e v e n u e s , but t h e s e r e v e n u e s t u r n e d o u t to b e c o n s i d e r a b l y l o w e r t h a n the p r e v i o u s a m o u n t , so the e m p l o y e r s ' c o n t r i b u t i o n w a s r e - e s t a b l i s h e d in 1 9 8 4 . Evas i o n is o f f i c i a l l y e s t i m a t e d at 3 0 p e r c e n t a n d u n o f f i c i a l l y at 4 0 p e r c e n t ; p a y m e n t delays are even worse. As l o w e r - i n c o m e groups have b e c o m e c o v e r e d by t h e p e n s i o n s c h e m e , their c o n t r i b u t i o n s h a v e b e c o m e s m a l l e r (but they are still e n t i t l e d to a m i n i m u m p e n s i o n ) . I h a v e a l s o n o t e d w i d e s p r e a d u n d e r r e p o r t i n g of i n c o m e a n d s a l a r i e s . R e s e r v e s u s e d to a c c o u n t f o r as m u c h as 2 8 p e r c e n t of G D P , b u t they w e r e i n v e s t e d in s t a t e s e c u r i ties at a f i x e d interest rate ( w h i c h r e s u l t e d in a 16 p e r c e n t n e g a t i v e rate); w h e n t h e s t a t e c a n c e l e d its o b l i g a t i o n in 1 9 7 0 t h o s e f u n d s had s h r u n k to 1 p e r c e n t of G D P .

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T h e e c o n o m i c c r i s i s of t h e 1 9 8 0 s a g g r a v a t e d t h e d e f i c i t : i n d u s t r i a l e m p l o y m e n t d e c l i n e d 3 9 p e r c e n t f r o m 1 9 7 5 - 1 9 8 8 a n d i n d u s t r i a l real s a l a r i e s by 25 p e r c e n t , t h u s r e d u c i n g r e v e n u e s . T h e p e r c e n t a g e of the p o p u l a t i o n a g e 6 5 and o v e r i n c r e a s e d f r o m 4 p e r c e n t to 10 p e r c e n t f r o m 1 9 5 0 - 1 9 9 1 , and life e x p e c t a n c y also g r e w s i g n i f i c a n t l y . B e c a u s e c o v e r a g e w a s a l m o s t u n i v e r s a l , t h e r a t i o of c o n t r i b u t o r s to p e n s i o n e r s r a p i d l y d e c l i n e d to 1 . 6 2 in 1990 ( a n d to 1 in the s e l f - e m p l o y e d b r a n c h ) a n d w a s p r o j e c t e d to f u r t h e r d e c r e a s e to 1.46 by 2 0 2 5 . T o f i n a n c e t h e p e n s i o n s c h e m e u n d e r c u r r e n t c o n d i t i o n s the r a t i o s h o u l d be 4. P r o j e c t i o n s f o r 1 9 9 5 - 2 0 2 5 s h o w that the w a g e c o n t r i b u t i o n w o u l d h a v e to a l m o s t t r i p l e (to 5 5 p e r c e n t ) or t h e state s u b s i d y w o u l d h a v e to i n c r e a s e to 6 2 p e r c e n t of e x p e n d itures to m a i n t a i n p a y m e n t of p e n s i o n s . T h e c u m u l a t i v e d e f i c i t of t h e s c h e m e in the next 3 0 y e a r s is e s t i m a t e d to b e c o m e e q u a l to the n a t i o n a l debt w i t h all f o r e i g n b a n k s in 1991 ( S c h u l t h e s s 1 9 9 0 ; M e s a - L a g o 1 9 9 1 d , 1992a; F e l d m a n 1992; El P o d e r E j e c u t i v o N a c i o n a l 1 9 9 2 ) .

Reform

Proposal

For at least a d e c a d e the u r g e n t n e e d f o r a g l o b a l r a d i c a l r e f o r m ( i n s t e a d of a partial c o s m e t i c o n e ) has b e e n o b v i o u s to e x p e r t s a n d g o v e r n m e n t o f ficials, b u t s e v e r a l legal d r a f t s to a c c o m p l i s h that task h a v e f a i l e d . Part of the e x p l a n a t i o n is the a b s e n c e of a c c u r a t e k n o w l e d g e a b o u t t h e p o p u l a tion; a n o t h e r is the r e l u c t a n c e of p o l i t i c i a n s to " b i t e the b u l l e t . " I n t e r v i e w s c o n d u c t e d in 1 9 9 0 with l e a d e r s of political p a r t i e s , t r a d e u n i o n s , a s s o c i a tions of p e n s i o n e r s , and s e l e c t e d e m p l o y e r g r o u p s s h o w e d that they h a d a r e m a r k a b l e lack of i n f o r m a t i o n o n b o t h t h e c u r r e n t p e n s i o n s c h e m e a n d p r o p o s a l s f o r its r e f o r m . If this w a s true a m o n g a s u p p o s e d l y w e l l - i n f o r m e d e l i t e , the s i t u a t i o n a m o n g the m a s s of t h e p o p u l a t i o n h a d to b e m u c h w o r s e (Isuani 1 9 9 1 ) . A t e c h n i c a l p r o j e c t p r e p a r e d in 1 9 8 8 by the s t a t i s t i c a l s e c t i o n of t h e u n d e r s e c r e t a r y of s o c i a l s e c u r i t y tried to s a v e t h e o l d s c h e m e t h r o u g h m i n o r m o d i f i c a t i o n s ( s u c h as an i n c r e a s e in the a g e of r e t i r e m e n t ) a n d by s e c u r i n g an u n r e a l i s t i c 7 p e r c e n t of G D P a n n u a l l y to f i n a n c e the d e f i c i t . It n e v e r m a d e it to the c o n g r e s s . A n o t h e r u n s u c c e s s f u l legal d r a f t , d e v e l o p e d by t h e u n d e r s e c r e t a r y of social security ( P r o y e c t o E s t r a d a ) in 1990, tried m o r e s e r i o u s l y to s o l v e the p r o b l e m , m o s t l y by t i g h t e n i n g t h e c o n d i t i o n s a n d b e n e f i t s of the e x i s t i n g s c h e m e : r a i s i n g the a g e of r e t i r e m e n t to 6 5 / 6 2 p l u s 3 5 y e a r s of c o n t r i b u tion; r e d u c i n g p e n s i o n s to 65 p e r c e n t of a b a s e salary c a l c u l a t e d as an average of t h e 10 years prior to r e t i r e m e n t ; i n c r e a s i n g t h e c o n t r i b u t i o n level by 1 p e r c e n t a g e point; e l i m i n a t i n g p r i v i l e g e d p r o g r a m s ; a n d c o n v e r t i n g the c o s t l y s e l f - e m p l o y e d b r a n c h into a p u b l i c a s s i s t a n c e p r o g r a m u n d e r t h e c h a r g e of a n d totally f i n a n c e d by t h e state. T h e d r a f t a l s o a l l o w e d a p r i v a t e s u p p l e m e n t a r y s c h e m e to w h i c h t h o s e i n s u r e d in t h e p u b l i c s c h e m e

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c o u l d s h i f t as m u c h as 2 p e r c e n t of t h e i r o w n c o n t r i b u t i o n s ( F e l d m a n 1992). T h e a b o v e two d r a f t s w e r e not p r e c e d e d by substantial study a n d w e r e v i r t u a l l y k e p t s e c r e t by the u n d e r s e c r e t a r y of social s e c u r i t y . A n e w app r o a c h w a s f o l l o w e d by P r e s i d e n t M e n e m ' s a d m i n i s t r a t i o n and t h e n e w under secretary, Walter Schulthess. With external funding, some 30 technical s t u d i e s w e r e c o n d u c t e d f r o m 1 9 8 9 - 1 9 9 1 c o v e r i n g virtually all legal, e c o n o m i c , and statistical a s p e c t s of the r e f o r m ( M e s a - L a g o 1992a). S e v e r a l legal d r a f t s w e r e d e v e l o p e d , b u t the o n e s u b m i t t e d to c o n g r e s s in M a y 1 9 9 2 w a s v o t e d d o w n . A r e v i s e d legal d r a f t i n c o r p o r a t i n g s u b s t a n t i a l m o d i f i c a t i o n s r e q u e s t e d by legislators w a s ready in A u g u s t of that year, and a n other d r a f t with m o r e (but m i n o r ) c h a n g e s w a s delivered to the c o m m i s s i o n of p e n s i o n s of the c h a m b e r of d e p u t i e s t o w a r d the e n d of the y e a r . T h e legal d r a f t w a s s u b m i t t e d to the c h a m b e r of d e p u t i e s in F e b r u a r y 1 9 9 3 a n d a p p r o v e d in April of that y e a r , the s e n a t e a p p r o v e d it in O c t o b e r , a n d the p r e s i d e n t s i g n e d it the s a m e m o n t h . It will e n t e r in f o r c e in July 1994. ( T h e text of the law w a s still u n a v a i l a b l e at the t i m e of this w r i t i n g . ) General features of the proposed reform. T h e p r o p o s e d system is m i x e d , a c o m b i n a t i o n of (1) a p e r m a n e n t public s c h e m e based on a p a y - a s - y o u - g o a p p r o a c h and on p a y i n g a b a s i c pension and (2) a s u p p l e m e n t a r y private s c h e m e ; it is fully f u n d e d a n d very similar to C h i l e ' s . All those age 18 and o v e r are m a n d a t o r i l y c o v e r e d by the n e w s y s t e m , as are f u t u r e entrants in the labor f o r c e . (A p r e v i o u s version of the legal draft divided the insured p o p u lation into two g r o u p s : those a g e 45 and over would stay in the old p u b l i c s c h e m e — w i t h an option to join the new s y s t e m — a n d those under 4 5 w o u l d m a n d a t o r i l y enter the latter.) T h e r e f o r e the public s c h e m e is not closed, and the private s c h e m e s u p p l e m e n t s rather than replaces the public s c h e m e . A n o t h e r important f e a t u r e is that in A r g e n t i n a the s e l f - e m p l o y e d are c o m pulsorily c o v e r e d (a situation that predated the new system), w h e r e a s they have v o l u n t a r y c o v e r a g e in Chile. E m p l o y e r contributions are m a i n t a i n e d in A r g e n t i n a . T h e r e is no r e d u c t i o n in the i n s u r e d ' s contribution and t h u s n o increase in their salary (as in Chile). All s a l a r i e d w o r k e r s in t h e p r i v a t e a n d p u b l i c s e c t o r s ( e x c e p t p r o v i n c e s a n d m u n i c i p a l i t i e s that m a y c h o o s e not to e n t e r t h e s y s t e m ) as w e l l as t h e s e l f - e m p l o y e d a r e c o v e r e d ; all d i f f e r e n c e s a m o n g t h e t h r e e b r a n c h e s a r e e l i m i n a t e d . V o l u n t a r y c o v e r a g e is a v a i l a b l e f o r m e m b e r s of co-ops, housewives, the church, and other minor groups. Contributions are u n i f o r m f o r the w h o l e s y s t e m : t h e s a l a r i e d i n s u r e d pay 11 p e r c e n t of their w a g e s and the e m p l o y e r s 16 percent, w h e r e a s the s e l f - e m p l o y e d pay 2 7 percent of their i n c o m e s (the s u m of b o t h p e r c e n t a g e s f o r s a l a r i e d w o r k e r s ) . T h e e m p l o y e r s ' c o n t r i b u t i o n s a n d 16 p e r c e n t of t h e s e l f - e m p l o y e d ' s s a l a r i e s g o to t h e p u b l i c s c h e m e , a n d t h e s a l a r i e d i n s u r e d ' s c o n t r i b u t i o n s p l u s 11 p e r c e n t of t h e s e l f - e m p l o y e d ' s s a l a r i e s g o to the p r i v a t e s c h e m e .

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( N o t e that t h e s e l f - e m p l o y e d h a v e a p e r c e n t a g e c o n t r i b u t i o n that a l m o s t t r i p l e s that of the s a l a r i e d w o r k e r ; in C h i l e b o t h p e r c e n t a g e s a r e i d e n t i c a l , b u t c o m p l i a n c e a m o n g the r e g i s t e r e d s e l f - e m p l o y e d is still v e r y p o o r — a s i t u a t i o n that a u g u r s a w o r s e s c e n a r i o in A r g e n t i n a . ) All c o n t r i b u t i o n s are c o l l e c t e d by A N S E S , the a d m i n i s t r a t i v e a r m of the u n i f i e d s y s t e m of s o cial s e c u r i t y , w h i c h t r a n s f e r s the c o r r e s p o n d i n g p o r t i o n s to the p u b l i c a n d p r i v a t e s c h e m e s . P a y m e n t of t h e p u b l i c ( b a s i c ) a n d p r i v a t e ( s u p p l e m e n tary) c o m p o n e n t s of a p e n s i o n are u n i f i e d . T h e destitute w h o h a v e r e a c h e d a c e r t a i n a g e but are not c o v e r e d by the s y s t e m are e n t i t l e d to a p u b l i c ass i s t a n c e p e n s i o n ( c o n d i t i o n e d to a m e a n s t e s t ) that is d i r e c t l y p a i d a n d fin a n c e d by the state out of g e n e r a l r e v e n u e . T h e a g e of r e t i r e m e n t in b o t h s c h e m e s will i n c r e a s e g r a d u a l l y in the n e x t 2 0 y e a r s f r o m 6 0 / 5 5 to 6 5 f o r b o t h m a l e a n d f e m a l e s a l a r i e d w o r k e r s a n d f r o m 6 0 to 6 5 f o r s e l f - e m p l o y e d f e m a l e w o r k e r s ; 3 0 y e a r s of w o r k a n d c o n t r i b u t i o n are a l s o req u i r e d . T h e s e c o n d i t i o n s are t o u g h e r t h a n C h i l e ' s : f i v e m o r e y e a r s f o r f e m a l e s — t h o u g h this will e l i m i n a t e s t a t u t o r y d i f f e r e n c e s in t h e level of p e n s i o n s — a n d 10 m o r e y e a r s of c o n t r i b u t i o n . But the c u r r e n t d e b t of the A r g e n t i n e a n s y s t e m is c o n s i d e r a b l y w o r s e t h a n that of C h i l e in 1 9 8 0 . Public scheme. All those insured are entitled to a universal basic pension plus a c o m p e n s a t o r y b e n e f i t . T h e basic pension is equal to 2.5 A M P O s , i.e., 2.5 times the value that results f r o m d i v i d i n g the c o n t r i b u t i o n s g o i n g to the private s c h e m e (basically those of the i n s u r e d ) by the n u m b e r of those registered in the s y s t e m ; the v a l u e of an A M P O is estimated t w i c e a year. If an insured has more than 30 and up to 4 5 years of c o n t r i b u t i o n s the basic pension is increased at a rate of 1 percent per year. T h e basic pension thus eliminates the need f o r a m i n i m u m pension as in the Chilean s y s t e m . T h e c o m p e n s a t o r y b e n e f i t is s i m i l a r to C h i l e ' s r e c o g n i t i o n b o n d , but rather than b e i n g d e p o s i t e d by the s t a t e in an i n s u r e d ' s i n d i v i d u a l p r i v a t e s c h e m e a c c o u n t (at the t i m e of r e t i r e m e n t ) it is p a i d by t h e p u b l i c s c h e m e . It is c a l c u l a t e d at the rate of 1.5 p e r c e n t of the b a s e s a l a r y ( t h e s a l a r y ave r a g e of t h e last 10 y e a r s p r i o r to r e t i r e m e n t ) f o r e a c h y e a r of w o r k / c o n t r i b u t i o n , w i t h a m a x i m u m of 3 6 y e a r s , a n d t h e r e s u l t i n g s u m is a d j u s t e d f o r i n f l a t i o n . T h e r e f o r e t h e r e is a c e i l i n g of 6 0 p e r c e n t of the b a s e s a l a r y ( a s well as a m a x i m u m of o n e A M P O f o r e a c h year of w o r k ) , a n d t h e r e is n o 4 p e r c e n t interest p a y m e n t as in t h e C h i l e a n c a s e . T h e s e f a c t o r s s h o u l d r e d u c e the c o s t of this b e n e f i t . ( A p r e v i o u s d r a f t v e r s i o n e x c l u d e d t h i s b e n e f i t a l t o g e t h e r , but l e g i s l a t i v e p r e s s u r e f o r c e d its e v e n t u a l i n c l u s i o n . ) For t h o s e w h o are a g e 4 5 and o l d e r , d i s a b i l i t y a n d s u r v i v o r s p e n s i o n s are paid by the public s c h e m e , w h i c h might receive s o m e c o m p e n s a t i o n f r o m the p r i v a t e s c h e m e o r i n s u r a n c e c o m p a n i e s w h o c o v e r a y o u n g e r p o p u l a t i o n . A d j u s t m e n t of all p u b l i c p e n s i o n s to the cost of l i v i n g will be b a s e d on the A M P O . All p u b l i c p e n s i o n e r s are also entitled to t w o m o n t h ' s w o r t h of e x t r a p e n s i o n s , a c o s t l y l e g a c y f r o m p r e r e f o r m l e g i s l a t i o n . T h e

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draft also eliminates the payment of more than one pension to an individual as well as pension payments to those with income from working. T h e entire public scheme is administered by A N S E S . The public s c h e m e is f i n a n c e d by the i n s u r e d ' s c o n t r i b u t i o n s of 11 percent (explained a b o v e ) plus the f o l l o w i n g : up to 25 percent of IVA revenue, 100 percent of revenue from selling shares of the state petroleum enterprise, and 20 percent f r o m the profit tax. (A previous draft included a tax on enterprises' "primary surplus" that was highly controversial and thus eliminated in the current draft.) In addition, the private s c h e m e will buy state bonds, and there is the possibility of long-term loans f r o m multilateral lending agencies. It is said that the federal g o v e r n m e n t might reduce its financial contribution to the provinces and transfer those resources to the public pension scheme. Private scheme. The private scheme is virtually identical to Chile's except for the differences noted above plus the following: (1) the private corporations administering the system are abbreviated as AFJPs instead of AFPs; (2) the mandatory insured's contribution rate of 11 percent for the old-age scheme is 1 percentage point higher than Chile's, and the voluntary additional contribution is not specified; (3) the contributions to pay for disability/ survivors premiums to the insurance companies are not listed separately from the commissions to the AFJPs; (4) the unified system of payment of contributions through A N S E S reduces the burden on employers, particularly small ones, but if it is not efficient it may not be fast enough to transfer the funds and so could generate errors and legal claims; (5) the required capital of an AFJP is equivalent to U.S. $1.5 million, less than the U.S. $2 million now required in Chile but much more than the initially required sum of U.S. $100,000 in Chile; (6) changes among AFJPs are limited to two annually, which reduces the seller's gains but limits the insured's freedom of choice; (7) AFJPs are not allowed to have publicity without approval, and thereafter their publicity is subject to state control (an advantage over the Chilean system); (8) the maximum percentages allowed for AFJP investment in particular instruments are much more flexible than in Chile; for instance, as much as 80 percent can be invested in state securities and 30 percent in securities from provinces, municipalities, and public enterprises (the combined maximum in Chile is 45 percent), and the maximum for all enterprise shares is 70 percent (30 percent in Chile); (9) insurance companies must be dedicated exclusively to managing their disability/survivors insurance and life annuity programs (it remains to be seen whether companies with such narrowness are profitable or if that stipulation will increase the premiums; (10) trade unions, associations of entrepreneurs and professionals, cooperatives, mutual aid societies, and banks are allowed to operate AFJPs but only as separate enterprises, something prohibited in Chile, where only corporations (i.e., sociedades anónimas) may do so; (11) the superintendency of the private scheme is not financed by the state (as in Chile) but by the AFJP, a practice

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that should increase the latter's costs and c o m m i s s i o n s ; and (12) the state provides s o m e guarantees to the insured not available in Chile; for instance, if an insurance c o m p a n y goes bankrupt, the state is responsible for paying the life annuity to the pensioner.

Uruguay: The Reform of the Prototypical Welfare State U r u g u a y is the p r o t o t y p i c a l w e l f a r e state in the W e s t e r n h e m i s p h e r e a n d the p i o n e e r in the inception of social i n s u r a n c e . Its first p e n s i o n p r o g r a m s w e r e i n t r o d u c e d early in the twentieth c e n t u r y . T h e c o m b i n a t i o n of press u r e f r o m interest g r o u p s , a pluralistic d e m o c r a c y , and c l i e n t e l i s t i c politics in both traditional parties led in the 1960s not only to the most develo p e d and g e n e r o u s social s e c u r i t y s y s t e m in L A C but a l s o to the m o s t s t r a t i f i e d and c o s t l y . T h e s y s t e m ' s heavy b u r d e n (15 p e r c e n t of G D P , 6 2 percent of fiscal e x p e n d i t u r e s , and 65 percent of the w a g e tax) c o n t r i b u t e d to the e c o n o m i c s t a g n a t i o n s u f f e r e d by U r u g u a y . S i n c e the e n d of the 1960s there has been a p r o c e s s of r e f o r m that has u n i f i e d the a d m i n i s t r a tion of multiple s c h e m e s and has fairly s t a n d a r d i z e d the e n t i t l e m e n t c o n d i t i o n s and b e n e f i t s of most of t h e m . N e v e r t h e l e s s , the r e f o r m s have not c o r r e c t e d the f u n d a m e n t a l p r o b l e m s of the s y s t e m , w h i c h since the m i d 1970s has been besieged by persistent deficits that require substantial state s u b s i d i e s in spite of e x t r e m e l y high payroll c o n t r i b u t i o n s . P e n s i o n s h a v e been t a k i n g an i n c r e a s i n g p e r c e n t a g e of b e n e f i t e x p e n d i t u r e s — f r o m 6 6 percent in 1970 to 8 0 percent in 1 9 9 0 — a n d g e n e r a t e close to half the system deficit ( M e s a - L a g o 1978; Dixon 1990; B P S 1990; S a l d a f n 1992).

The Administrative

Organization

of

Pensions

T h e g e n e r a l social security institute in U r u g u a y is the social i n s u r a n c e b a n k ( B a n c o de P r e v i s i o n S o c i a l — B P S ) , w h i c h in a d d i t i o n to p e n s i o n s 9 also m a n a g e s s i c k n e s s , m a t e r n i t y , u n e m p l o y m e n t , and f a m i l y - a l l o w a n c e p r o g r a m s . T h e r e are three m a j o r o c c u p a t i o n a l g r o u p s w i t h i n B P S (such g r o u p s previously had i n d e p e n d e n t f u n d s ) : (1) civil s e r v a n t s and teachers; (2) industry and c o m m e r c e w o r k e r s ; and (3) rural w o r k e r s a n d d o m e s t i c servants (this g r o u p also includes p e n s i o n s for the d i s p o s s e s s e d ) . O u t s i d e of the B P S there are s e v e n a d d i t i o n a l i n d e p e n d e n t p e n s i o n s c h e m e s : o n e each for b a n k i n g workers, university professionals, notary publics, the military, and the police, and t w o for j o c k e y s . A b o u t 87 percent of the insured and 9 0 percent of the p e n s i o n e r s are in the B P S ( D G E C 1988; B P S 1990).

Coverage

of the Labor Force

S t a t i s t i c s o n the labor f o r c e , e m p l o y m e n t , a n d p a r t i c u l a r l y the total n u m b e r of i n s u r e d are s c a r c e ; t h o s e o n the total n u m b e r of i n s u r e d are

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f r a g m e n t a r y , s u f f e r f r o m w i d e g a p s , and are o f t e n c o n f u s i n g a n d c o n t r a dictory. T h e r e f o r e the f o l l o w i n g e s t i m a t e s s h o u l d be taken with c a u t i o n . Social insurance c o v e r a g e (all f u n d s ) d e c l i n e d f r o m 8 1 - 8 2 percent of the labor f o r c e f o r 1 9 7 5 - 1 9 8 1 to a t r o u g h of 6 7 - 6 8 p e r c e n t f o r 1 9 8 4 - 1 9 8 5 and then i n c r e a s e d to 7 6 p e r c e n t in 1 9 8 7 ( a n o t h e r e s t i m a t e f o r 1 9 8 7 is substantially lower: 6 3 p e r c e n t ) . T h e d e c l i n e w a s a result of the e c o n o m i c crisis; in the s e c o n d half of the 1980s the m o d e s t e c o n o m i c r e c u p e r a t i o n , d e c r e a s i n g u n e m p l o y m e n t , a n d b e t t e r c o n t r o l m e a s u r e s led to i n c r e a s e d c o v e r a g e , but not to the precrisis level. T h e d e g r e e of c o v e r a g e varies significantly a m o n g o c c u p a t i o n a l g r o u p s : it is universal a m o n g civil servants, t e a c h e r s , the a r m e d f o r c e s , and p o s s i b l y b a n k i n g w o r k e r s ; it e f f e c t i v e l y extends to at least t h r e e - f o u r t h s of industry and c o m m e r c e but only half of rural w a g e e a r n e r s , o n e - t h i r d of the s e l f - e m p l o y e d , and o n e - f i f t h of the d o m e s t i c s e r v a n t s . H o w e v e r , the n o n i n s u r e d d i s p o s s e s s e d are e n t i t l e d to assistance p e n s i o n s , so c o v e r a g e is virtually universal. B e c a u s e of the a g i n g of the p o p u l a t i o n , a net n e g a t i v e m i g r a t i o n of the y o u n g , and g e n e r o u s e n t i t l e m e n t c o n d i t i o n s , the ratio of all c o n t r i b u t ing insured to all p e n s i o n e r s steadily d e c r e a s e d f r o m 1.8 in 1975 to 1.2 in 1989 ( L a c u r c i a 1990). W i t h i n the B P S the ratio declined f r o m 1.7 to 1.0 f r o m 1 9 6 3 - 1 9 8 8 , or f r o m 2.4 to 1.3 if o n e entire survivor p e n s i o n is used ( r a t h e r than the a v e r a g e t h r e e p e n s i o n e r s f o r this type of p e n s i o n ) . R e g a r d l e s s of the quality of the data it can s a f e l y be said that at the b e g i n n i n g of the 1 9 9 0 s e a c h a c t i v e w o r k e r s u p p o r t e d o n e p e n s i o n e r in U r u g u a y — t h e lowest a c t i v e / p a s s i v e ratio in the entire c o n t i n e n t . In 1 9 8 6 the lowest ratios ( r a n g i n g f r o m 0 . 9 - 1 . 2 ) w e r e f o u n d a m o n g rural w o r k e r s , d o m e s t i c s e r v a n t s , the p o l i c e , civil s e r v a n t s , and t e a c h e r s , w h e r e a s the h i g h e s t ratios ( r a n g i n g f r o m 1 . 5 - 3 . 4 ) w e r e r e g i s t e r e d a m o n g u n i v e r s i t y p r o f e s s i o n a l s and i n d u s t r y and c o m m e r c e w o r k e r s ( M e s a - L a g o 1978, 1992c; G i r a l - B o s c a a n d D i é g u e z 1988; D G E C 1988, 1 9 8 9 ; B P S 1 9 8 6 1990; R e p ú b l i c a 1992).

Generous Entitlement Conditions, Benefits, and Adjustments for Pensions P r a c t i c a l l y all p e n s i o n p r o g r a m s in U r u g u a y w e r e i n t r o d u c e d in the f i r s t f o u r d e c a d e s of the t w e n t i e t h c e n t u r y , w h e n life e x p e c t a n c y at birth w a s c o n s i d e r a b l y l o w e r than the c u r r e n t 7 2 y e a r s . T h e p o p u l a t i o n w a s a l s o m u c h y o u n g e r then, but in 1 9 8 5 15.4 p e r c e n t of it w a s 6 0 years and o l d e r (23 percent a m o n g the urban p o p u l a t i o n ) , and that p r o p o r t i o n — t h e highest in L A C — i s e x p e c t e d to i n c r e a s e to 17 p e r c e n t by the y e a r 2 0 0 0 . A l m o s t o n e - f o u r t h of the total p o p u l a t i o n w a s under s o m e type of p e n s i o n at the end of the 1 9 8 0 s . T h e p e r c e n t a g e of the p o p u l a t i o n 6 0 years a n d older d e p e n d e n t on the w o r k i n g - a g e p o p u l a t i o n increased f r o m 19 p e r c e n t in 1963 to 28 percent in 1990.

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In s p i t e of the a g i n g of the p o p u l a t i o n s e v e r a l p e n s i o n p r o g r a m s red u c e d the a g e of e a r l y r e t i r e m e n t or i n t r o d u c e d s e n i o r i t y p e n s i o n s b a s e d on y e a r s of s e r v i c e r e g a r d l e s s of a g e . By t h e e n d of the 1 9 7 0 s the n o r m a l a g e of r e t i r e m e n t f o r m o s t i n s u r e d w a s 5 0 f o r m a l e s a n d 4 5 f o r f e m a l e s ; f u r t h e r m o r e , in the s p e c i a l p r o g r a m s a n d s o m e i n d e p e n d e n t f u n d s it w a s p o s s i b l e to retire a f t e r 2 0 or 25 y e a r s of s e r v i c e s ( 1 0 u n d e r c e r t a i n c o n d i t i o n s ) , i.e., at age 4 0 or e v e n e a r l i e r . T h e s e p r i v i l e g e d s c h e m e s a l s o g r a n t e d p e n s i o n s f i v e t i m e s h i g h e r t h a n the g e n e r a l a v e r a g e a n d a l l o w e d the a c c u m u l a t i o n of m u l t i p l e p e n s i o n s w i t h o u t a limit. Legal r e f o r m s in 1979 a n d 1987 c u r t a i l e d s o m e of t h e liberal c o n d i tions and b e n e f i t s . T h e first r e f o r m ( 1 ) i n c r e a s e d the a g e of r e t i r e m e n t in the general s y s t e m f r o m 5 0 / 4 5 to 6 0 / 5 5 ; (2) e l i m i n a t e d the p e n s i o n g r a n t e d after 10 years of s e r v i c e f o r w o m e n with c h i l d r e n and d i s m i s s e d w o r k e r s ; (3) t i g h t e n e d the c a l c u l a t i o n of b e n e f i t s ; ( 4 ) a b o l i s h e d an e x t r a m o n t h of pension paid a n n u a l l y ; and (5) s t a n d a r d i z e d e n t i t l e m e n t c o n d i t i o n s to a certain e x t e n t f o r most g r o u p s u n d e r the B P S . But this r e f o r m m a i n t a i n e d the p r i v i l e g e d s c h e m e s f o r top political j o b s , j u d g e s , and t e a c h e r s a n d a l l o w e d g e n e r o u s c o n d i t i o n s for r e t i r e m e n t d u r i n g a transitional p e r i o d . A s a result of this t r a n s i t i o n a l p e r i o d t h e r e w a s a w a v e of r e t i r e m e n t s in 1 9 8 0 and 1981, at t w i c e the rate of 1 9 6 9 - 1 9 7 9 , and half of t h o s e w h o r e t i r e d w e r e b e l o w the higher a g e s e s t a b l i s h e d by the new rules. T h e 1979 r e f o r m f a i l e d to t a c k l e the f u n d a m e n t a l p r o b l e m s of the crisis, a n d its net o u t c o m e w a s negative, at least in the m e d i u m t e r m , as s h o w n by the w o r s e n i n g deficit of social security f r o m 1 9 8 0 - 1 9 8 4 (as d i s c u s s e d b e l o w ) . T h e 1987 legal d r a f t r a i s e d the a g e of r e t i r e m e n t f r o m 6 0 / 5 5 to 6 5 / 6 0 , a p o i n t r e j e c t e d by the l e g i s l a t o r s . T h e e n a c t e d law ( 1 ) r e d u c e d s o m e of the liberal c o n d i t i o n s of the p r i v i l e g e d s c h e m e s (but still m a i n t a i n e d significant differences between them and the general system); (2) introduced a c e i l i n g of 15 t i m e s the m i n i m u m w a g e f o r all p e n s i o n s ; ( 3 ) p r o h i b i t e d the a c c u m u l a t i o n of m o r e than t w o p e n s i o n s ( o n e f r o m t h e B P S a n d ano t h e r o u t s i d e ) ; (4) e s t a b l i s h e d a m i n i m u m p e n s i o n ; (5) a d j u s t e d p e n s i o n s b a s e d o n the a v e r a g e s a l a r y i n d e x f o r the p r e v i o u s y e a r ; a n d ( 6 ) e l i m i n a t e d the s a l a r y c e i l i n g f o r c o n t r i b u t i o n s a n d a d d e d n e w t a x e s (as d i s c u s s e d b e l o w ) . C o n t r a r y to the first r e f o r m , the 1 9 8 7 r e f o r m h a d p o s i t i v e f i n a n c i a l r e s u l t s (an e s t i m a t e d i n c r e a s e in r e v e n u e of 0 . 2 p e r c e n t of G D P ) but still did not raise the a g e of r e t i r e m e n t . At the e n d of 1989, d e s p i t e the a d j u s t m e n t s d e c r e e d by law, the a v e r age p e n s i o n w a s 2 5 p e r c e n t of the level in 1962 ( L a c u r c i a 1 9 9 0 ) . T h e c o n s t i t u t i o n a l a m e n d m e n t , a p p r o v e d by 8 0 p e r c e n t of t h e p o p u l a t i o n in t h e 1989 plebiscite, m a n d a t e d that s t a r t i n g in 1 9 9 0 p e n s i o n s be a d j u s t e d e v e r y t i m e that s a l a r i e s of the p u b l i c s e c t o r are a d j u s t e d and that the a d j u s t m e n t s e q u a l the i n c r e a s e in the cost of l i v i n g in the p e r i o d i m m e d i a t e l y b e f o r e h a n d . T h a t a c t i o n p a r t l y o f f s e t t h e p o s i t i v e f i n a n c i a l e f f e c t s of t h e 1 9 8 7 r e f o r m and r e q u i r e d s i g n i f i c a n t i n c r e a s e s in taxation (as d i s c u s s e d b e l o w ) .

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A d e v a s t a t i n g reversal o c c u r r e d w h e n the pension c e i l i n g of 15 times the m i n i m u m w a g e , set by the 1987 law, w a s d e c l a r e d u n c o n s t i t u t i o n a l . T h e e l i m i n a t i o n of the c e i l i n g will largely b e n e f i t civil s e r v a n t s and teachers, w h o s e high p e n s i o n s are the result of g e n e r o u s c o n d i t i o n s but are grossly u n d e r f i n a n c e d . In 1986 the a v e r a g e o l d - a g e pensions for civil servants and teachers w e r e 56 percent and 36 p e r c e n t a b o v e the a v e r a g e B P S pension, r e s p e c t i v e l y , w h e r e a s t h o s e of i n d u s t r y and c o m m e r c e w e r e 16 p e r c e n t b e l o w and those of rural w o r k e r s and d o m e s t i c s e r v a n t s about 37 percent b e l o w . O u t s i d e of the B P S the a v e r a g e p e n s i o n of m i l i t a r y m e n in 1 9 8 2 w a s 4 0 0 p e r c e n t a b o v e the B P S a v e r a g e and that of the police and b a n k ing w o r k e r s 3 0 0 p e r c e n t a b o v e . Finally, the current a v e r a g e p u b l i c assistance p e n s i o n is c l o s e to half the a v e r a g e c o n t r i b u t o r y p e n s i o n ( G i r a l Bosca and D i e g u e z 1988; B P S 1990; M e s a - L a g o 1991b). T h e current entitlement c o n d i t i o n s and levels of salary replacement for BPS p e n s i o n s are s u m m a r i z e d in part A of T a b l e 3.1. In spite of the 1987 restrictions on p r i v i l e g e d s c h e m e s , political o f f i c i a l s and t e a c h e r s retain a d v a n t a g e o u s c o n d i t i o n s . T h e f o r m e r can retire o n c e the s u m s of their years of a g e and years of service equal 80; for instance, a 4 9 - y e a r - o l d o f ficial with 31 years of overall service (and a m i n i m u m of three in a political j o b ) is e l i g i b l e for an o l d - a g e p e n s i o n ( 5 - 1 0 y e a r s earlier than in the general system). T e a c h e r s can retire with 25 years of service regardless of a g e — h e n c e , at age 4 5 or even earlier ( 1 0 - 1 5 years earlier and with f i v e years less service than in the general s y s t e m ) — o r with 5 0 years of age and 20 years of service (a c o m b i n e d 20 years less than a male in the general system). T h e average period of an old-age pension for teachers and political officials ( b a s e d on life e x p e c t a n c y at the age of r e t i r e m e n t ) is c o n s i d e r a b l y higher than the period of w o r k / c o n t r i b u t i o n . Under the general system the f e m a l e period of retirement is only six years less than the period of contribution, and under the a d v a n c e d - a g e program the f o r m e r is f o u r years more than the latter. T h e a v e r a g e life e x p e c t a n c y of a f e m a l e p e n s i o n e r in the general s y s t e m is 2 4 . 2 years, c o m p a r e d with 16.2 years for m a l e s ; u n d e r special s c h e m e s those figures may be as high as 34 and 31 ( B P S 1991). C u r r e n t pension a d j u s t m e n t s in U r u g u a y are possibly the most g e n e r o u s in L A C for three r e a s o n s : the c a l c u l a t i o n of the p e n s i o n is b a s e d on the a v e r a g e salary of the last three years, a d j u s t e d for inflation; the current p e n s i o n is f u l l y a d j u s t e d to the c o s t of living a n n u a l l y ; a n d there is no ceiling to the a d j u s t e d p e n s i o n . T h e q u e s t i o n is h o w l o n g the p r o d u c t i v e labor f o r c e a n d the nation will be able to support such a heavy b u r d e n a n d such a t r a n s f e r of f u n d s f r o m the a c t i v e to the p a s s i v e p o p u l a t i o n .

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A c c o r d i n g to I L O data, in 1986 the cost of the entire social security system in U r u g u a y (all e x p e n d i t u r e s e x p r e s s e d as p e r c e n t a g e s of G D P ) w a s

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