Costa Rica: Technical Assistance Report-Universal Basic Pension: Objectives and Constraints

Technical Assistance Reports, May 17, 2024

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Canonical URL: Costa Rica: Technical Assistance Report-Universal Basic Pension: Objectives and Constraints

At the request of the Ministry of Finance, a mission from the International Monetary Fund visited San Jose to assess the proposal to a universal basic pension and to estimate its fiscal and welfare impact on the budget, on pension schemes, and on old age income poverty.
Costa Rica is entering a demographic transition which will see the old age dependency ratios significantly worsen in the coming 20 years.
The long-term financial sustainability of the general social security pension scheme (IVM) is a concern despite various reforms introduced over the past three decades; the scheme’s reserves are expected to be exhausted by the mid-2030s.

The government’s proposal intends to address:
- financial sustainability,
- the adequacy of coverage and of benefit levels,
- distributional equity
- through the introduction of a universal basic pension.

The IMF team’s assessment is that the proposal is unlikely to fully meet its stated objectives.
Key findings:
- The proposal will worsen social security pension scheme’s financial sustainability and create additional financing needs.
- This will translate into an accelerated exhaustion of IVM reserves and, after the reserves are depleted, require significant adjustments to IVM parameters or higher government transfers.
Implications:
- Greater near-term fiscal pressure and a need for new financing or benefit/parameter adjustments once reserves are exhausted.

Old age income security may be more effectively addressed, with less pronounced fiscal side-effects, through:
- improving coverage and compliance in IVM, and
- expanding the reach of the social pension scheme.
Primary instruments for achieving these goals:
- (a) amending the rules undermining compliance with registration and wage reporting regulations in the contributory schemes,
- (b) improving coordination between tax and contribution collection agencies,
- (c) amending the regulations governing eligibility for noncontributory social pensions, and
- (d) ensuring the noncontributory social pension is adequately financed.

Source: Costa Rica: Technical Assistance Report-Universal Basic Pension: Objectives and Constraints