Calculating the redistributive impact of pension systems in Latin America and the Caribbean

Abstract

This paper analyzes implicit subsidies in pension systems across Latin America and the Caribbean. First, we find that pension systems are designed to be progressive by granting a higher replacement rate to low-income workers than high-income workers. However, because all systems subsidize pensions beyond what an actuarially fair system would produce, the absolute subsidies are larger for high-income individuals. Second, using data from Colombia, Chile, El Salvador, Paraguay and Uruguay, we show that, in practice, pension systems tend to be regressive rather than progressive. This is because low-income workers, who contribute intermittently, typically receive no pension as they fail to meet the minimum contribution levels. In some defined benefit systems, 70–95% of subsidies are concentrated in the top three labor income deciles. In defined contribution systems, subsidies are less regressive, but 50–60% still concentrate on high-income deciles. Lastly, non-contributory pensions partially offset the regressivity of pension systems.