A New Proposal for Achieving a Better Mix of Pension Provision in Latin America

This paper has been produced by students from the LSE School of Public Policy MPP programme. It originated from a group project that is part of the ‘core’ curriculum for the MPP programme. The students worked independently on the research and in collaboration with experts from the Economic Commission for Latin America and the Caribbean (ECLAC). Abstract: Pension systems in Latin America have failed to meet one or more of their main objectives of consumption smoothing, insurance, poverty relief, and redistribution because they have low coverage, low replacement rates, and are often not financially sustainable. Considering the shortcomings and the analysis drawn on the experience of European countries, we have designed a flexible pension system that can respond to the varying economic and political specifics of LATAM countries. We propose a framework that considers different combinations of public/private and individual/collective aspects which could lead to a better provision of the mandatory earnings-related component in LATAM. The system comprises four components: (i) Collective Individual Defined Contribution, where workers' contributions go to their individual pensions account and are invested jointly with their cohort; (ii) Collective Insurance, (a new and flexible design) where workers contribute to a collective fund within their cohort; (iii) Solidarity component for those who have not reached a minimum number of contributions or that have not surpassed a pre-determined threshold; and (iv) Voluntary component, where individuals can further contribute to their pension. The concluding section provides a comprehensive summary of the proposal