The Collapse of the Models. Re-shaping Social Protection in Europe and Latin America
The 2010-decade was a challenging period for the world. Latin America’s economy was doing relatively well at the beginning of the decade. However, the region’s economy is stagnated.
The European Union has been struggling too. Besides economic stagnation, right-wing populist candidates have been on the rise. The populists’ slogans on preserving national identity and tackling uncontrolled immigration have gained traction. Further, the Brexit movement has made analysts and pundits question the European Union model of economic interconnectivity.
Almost every country in Latin America is facing massive protests.
In the UK and Catalonia, national groups are seeking independence. In France, last year the gilets jaunes movement protested fuel taxes and have been seeking more social demands.
The prevailing pacts—blocs, international agreements, trade relationships—ceased to give certainty.
The recent COP25 was a show of how these blocs are ill-equipped to deal with challenging issues like climate change.
Among other policy debates on repairing the models in question, the pensions system have been scrutinized. On the one hand, they raise the moral question about how society should reward employees who have been working their entire with retirement benefits. On the other hand, pundits question the financial burden of the retirement system. In particular, could governments afford to give retirement pension to retirees?
Reforms have been significant since 2000 among the OECD countries. In a nutshell, between 2015 – 2017 six countries modified their retirement age, one third changed contributions to pension funds, and one third changed the benefit levels for all or some retirees. Several of these reforms have been reversed by political pressure. In particular, Brazil, Chile, and France are in the middle of this reform wave. Let’s examine each case.
Brazil: an urgent but reductionist reform
The Brazilian reform bill was approved by Congress in October 2019. The changes were necessary as fiscal funds were depleting. In 2017, public pension spending consisted of 12% of GDP. A significant flaw in the pension system was the lack of minimum age for retirement and a mechanism to address their rapidly aging population. President Jair Bolsonaro established a minimum retirement age and a minimum period of contribution to pension funds.
Chile: a backlog that might be worth it
Chile’s scenario is different. Before the protests that started in October 2019, President Sebastián Piñera sent a pension bill to Congress. Its objectives were to increase the mandatory contribution and give incentives to delay retirement. However, the poorest retirees’ minimum pension doesn’t even cover the basic cost of food.
As a consequence of the recent social crisis in the country, Piñera suppressed the original bill and, instead, made a simple one in a hurry to transfer funds to the poorest pensioners.
The problem in the Chilean case is that the system lacks legitimacy. During Augusto Pinochet’s dictatorship, the pension system was privatized and individual contributions were managed by private Funds Pensions Administrators—differentiating the civilian system from the military’s.
Comparing with the previous pay-as-you-go, the current system improved funds’ investment returns and the final amount of the individual accounts. Chileans question the fairness of the system— some private entity gets profits from “the people” pensions contributions. Also, the Chileans criticize the difference between civilian and military pensions and the fact that the pension amount is correlated with working life earnings instead of a defined one.
France: attaching the symptoms but not the disease
France has a complex system. It is a pay-as-you-go model with 42 separate pension schemes. France has the biggest government in the OECD. It spends 53% of the country’s GDP and the public pension spending is 13.8% of GDP. The OECD’s average is 8.2. The retirement age is 61. The OECD’s average is 64.3. France’s life expectancy is one of the highest in developed countries at 82 years. The problem seems to be the financial sustainability of the French pension system.
Reforming a pension system to make it more sustainable implies, at least, the postponement of the retirement age, increase the return over the investment of the pensions funds, and increase the individual contribution during each person’s working life. Additionally, it is crucial to define what to do with these additional savings. The modification announced by Édouard Philippe, the prime minister of France, in December 2019, contemplates the replacement of the 42 schemes, eliminating those with special privileges. It will also increase the mandatory retirement age to 62, and will give incentives to postpone it even further —ideally until 64, as well as a minimum monthly pension of €1.000.
As it was in 2010 when President Sarkozy tried to make a pension reform, protests occurred immediately. This time it’s not just about the retirement age, but also the discontent of some unions that benefit from the 42 schemes.
Even though the French reform is going in the right direction, it doesn’t seem to make the system sustainable, since it doesn’t introduce a capitalization system for the additional savings as Denmark and Canada have done successfully. Also, the retirement age seems to be still too low given life expectancy. The reform will also face a very difficult sociopolitical front.
So, which country is better prepared for this challenge?
In terms of policy implementation, Brazil seems to be the most easy-going. The reform has been already approved, but it still doesn’t address Brazil’s income inequality.
Despite France being better prepared than the other two countries in institutional terms— democracy, income and wealth distribution, and state capacity— its reforming strategy is similar to Brazil’s: repairing some mechanical failures without watching the engine.
Chile is likely to produce greater reform as the country is immersed in deep conversations on a new constitutional process. Chileans are trying to redefine its institutional frameworks more than focusing on particular policies. Considering that, pension’s reform is still urgent and waiting for the new Constitution approval might be too long, the new Carta Magna could give legitimacy to the system, guaranteeing ulterior and deeper reforms.