Reversing Pension Privatizations: Rebuilding public pension systems in Eastern Europe and Latin America

Organization(s): ILO
Author: Carlos Grushka, Carmelo Mesa Lago, Dorottya Szikra, Elaine Fultz, Elena Maltseva, Fabio Bertranou, Fabio Durán-Valverde, Francisco Peña-Jarrín, Isabel Ortiz, Karlos Navarro Medal, Kenichi Hirose, Krzysztof Hagemejer, Luis Casanova, Luis Eduardo Díaz, Michał Polakowski, Oscar Cetrángolo, Saltanat Janenova, Stefan Urban, Veronika Wodsak, Zhiming Yu
Regions: Eastern Europe, Latin America
Country: Argentina, Bolivia, Bulgaria, Croatia, Ecuador, Estonia, Hungary, Kazakhstan, Latvia, Macedonia, Nicaragua, Poland, Romania, Slovakia, Venezuela
Year: 2018
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From 1981 to 2014, thirty countries privatized fully or partially their public mandatory pensions. Fourteen countries were in Latin America (by chronological order, Chile, Peru, Argentina, Colombia, Uruguay, Bolivia, Mexico, Venezuela, El Salvador, Nicaragua, Costa Rica, Ecuador, Dominican Republic and Panama), another fourteen countries in Eastern Europe and the former Soviet Union (Hungary, Kazakhstan, Croatia, Poland, Latvia, Bulgaria, Estonia, the Russian Federation, Lithuania, Romania, Slovakia, Macedonia, Czech Republic and Armenia), and two in Africa (Nigeria and Ghana). Most of the privatizations were supported by the World Bank, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), USAID and the Asian or Inter-American Development Banks, against the advice of the ILO.

As of 2018, eighteen countries have re-reformed and reversed pension privatization fully or partially: the Bolivarian Republic of Venezuela (2000), Ecuador (2002), Nicaragua (2005), Bulgaria (2007), Argentina (2008), Slovakia (2008), Estonia, Latvia and Lithuania (2009), the Plurinational State of Bolivia (2009), Hungary (2010), Croatia and Macedonia (2011), Poland (2011), the Russian Federation (2012), Kazakhstan (2013), the Czech Republic (2016) and Romania (2017). The large majority of countries turned away from privatization after the 2007-2008 global financial crisis, when the drawbacks of the private system became evident and had to be redressed.

With sixty per cent of countries that had privatized public mandatory pensions having reversed the privatization, and with the accumulated evidence of negative social and economic impacts, it can be affirmed that the privatization experiment has failed. Pension privatization did not deliver the expected results. Coverage rates stagnated or decreased, pension benefits deteriorated and gender and income inequality compounded, making privatization very unpopular. The risk of financial market fluctuations was shifted to individuals. Administrative costs increased reducing pension benefits. The high costs of transition – often underestimated – created large fiscal pressures. While private sector administration was supposed to improve governance, it weakened it instead. Workers’ participation in management was eliminated. In many cases, the regulatory and supervisory functions were captured by the same economic groups responsible for managing the pension funds, creating a serious conflict of interest; furthermore, the private insurance industry, which ultimately benefits from people’s savings, moved towards concentration. Last, but not least, pension reforms had limited effects on capital markets and growth in most developing countries.

The report then reviews the main experiences of re-reforming pensions and how countries reversed pension privatization, the laws enacted, basic characteristics of the new public model, new rights and entitlements, re-establishment of a public pension administrator, transfer of members and funds and recognition of past entitlements, financing and new contribution rates, contribution collection and fund management, supervisory and regulatory changes, governance and representation of employers and workers, social dialogue. While the reversals of pension privatization need more years to mature, clear and measurable improvements and positive impacts can already be observed in terms of reduced fiscal pressures, lower administrative costs, higher coverage and pension benefit levels, and reduced gender and income inequalities.

Pension privatization can be reversed quickly, in as a little as a few months. For those countries considering rebuilding their public pension systems, there are eleven main policy steps: (i) start social dialogue to generate consensus and launch communication campaigns; (ii) constitute a technical tripartite reform committee, in-charge of designing and implementing the re-nationalization of the pension system; (iii) enact law(s) with the main characteristics of the pay-as-you-go defined benefits scheme, in compliance with ILO social security standards; (iv) create a public pension institution/ administrator ensuring tripartite governance; (v) transfer members from the private to the public system; (vi) transfer the accumulated resources of the individual accounts; (vii) set new contribution rates and start collecting contributions for the new public pension system; (viii) close the contribution collection mechanism of the private system; (ix) implement inspection services and contribution enforcement mechanisms; (x) create the unit or entity in charge of investment management of the public pension scheme; (xi) close the private sector pension supervisory and regulatory body.

This paper and associated country case studies document the underperformance of private mandatory pensions, and abstract lessons for governments intending to improve their national pension systems. Strengthening public social insurance, coupled with non-contributory solidarity pensions, as recommended by ILO standards, have improved the financial sustainability of pension systems, made pension entitlements better and more predictable, allowing people to enjoy a better retirement in their older years. The responsibility of States to guarantee income security in old-age is best achieved by strengthening public pension systems.

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