Is Latin America Prepared for an Aging Population?

IMF Blog, December 11, 2018

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Is Latin America Prepared for an Aging Population?

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• Authors: supporting formal employment, gradually reforming pension, healthcare systems.
• Published: December 11, 2018

Demographic dividend and population trends

• Latin America is aging fast even though it remains comparatively young.
• "Today Latin American women have on average a little more than two children per woman. That is three times fewer than in 1950!"
• Fertility declines have begun even in higher-fertility countries: "Even in Guatemala and Bolivia, the two countries in the region with the highest fertility rates, the number of children per woman has started to fall rapidly."
• Life expectancy has risen: "close to 75 years." "Chileans and Costa Ricans can expect to live more than 80 years, slightly longer than United States residents."
• The demographic dividend (population aged 15–64 growing faster than population younger than 15 and older than 64) is ending, implying "fewer active people to support a growing number of dependents."
• Timing of dividend expiration:
  • Paraguay, Bolivia, and Guatemala: may still benefit until 2045.
  • Uruguay, Brazil, and Colombia: "have only a couple of years of dividend left."
  • Chile and Costa Rica: "the dividend is already over."

Pension spending—trade-offs and projections

• Current pension spending: "less than 4 percent of GDP on average" in Latin America, compared to "about 9 percent in high income countries and emerging Europe."
• As populations age, "public pension spending in the region is projected to increase steeply and narrow the gap with the advanced world."
• Systems and projected fiscal impacts:
  • Unfunded defined-benefit systems (pay-as-you-go, government-guaranteed benefits) are projected to experience higher increases in pension bills as the population ages; some countries risk "unsustainable financing gaps" that would add to public debt if reforms are not made.
  • Funded defined-contribution systems (individual savings and returns determine benefits) will experience lower (or even negative) increases in public pension spending, and "low or no financing gaps." However, "lower increases in public pension spending tend to be associated with low benefits or narrow pension coverage of the elderly."
• Examples of low benefits and coverage:
  • "In the Dominican Republic, Mexico, Bolivia, Chile, and El Salvador, pensioners receive benefits well below the average in other countries."
  • "In the Dominican Republic and El Salvador less than 20 percent of the elderly population receive a pension, with different combinations of contributory and non-contributory benefits."
• Social versus financial sustainability:
  • "Low levels of coverage and benefits could be perceived as inadequate and became socially unsustainable, ultimately resulting in higher fiscal liabilities if they create political pressure for the government to extend coverage, or top up pension benefits."
  • Key drivers of narrow coverage and insufficient benefits: high informality, low participation of women in labor markets, high commissions, low financial returns.
• Gender and inequality implications:
  • Women face lower coverage and benefits due to: (i) lower participation in the labor market, (ii) fewer years of salaried work due to childbearing, (iii) lower wages, (iv) earlier retirement ages, and (v) longer life expectancy, "resulting in higher old-age poverty among women."

Health care spending and long-term outlook

• Public health spending in the region currently "averages 4.4 percent of GDP."
• Spending has risen as countries "have embarked on efforts to increase coverage and reduce inequities."
• Medical costs escalate later in life, so an aging population increases health spending needs.
• Projections: "public health expenditure as a percentage of GDP in Latin America could reach the levels of advanced countries by 2100."
• Without reform, "Latin America is projected to experience the largest increase in health care expenditure of any region over the long term."

Policy options to lessen the fiscal and social impact

• Labor market measures:
  • "Promoting the labor force participation of women and the elderly."
  • "Fostering formalization."
• Pension reforms:
  • "Raising retirement ages and contribution rates, especially in countries where those are comparatively low."
  • "Reducing benefits in countries with excessively high pension entitlements."
  • Reforms should be "carefully designed to avoid discouraging formal employment."
• Health system reforms:
  • "Pursue efficiency-enhancing reforms while expanding access to basic healthcare services when coverage is low."
• Combined aim: "help moderate the impact of aging on government accounts while preserving equitable access to health services and adequate pension benefits."

Is Latin America Prepared for an Aging Population? December 11, 2018