The political economy of pension reform: Latin America in comparative perspective

Since pension schemes-along with health care and education-absorb the largest amount of social expenditure in all countries, their reform has a potentially major impact both on the fiscal situation of the state and on the life chances of citizens who stand to win or lose from new arrangements. This makes pension reform a highly controversial issue; and, except for the addition of new programmes and benefits, major restructuring of existing pension systems has been extremely rare in advanced industrial democracies. It was also rare in Latin America before the 1980s and 1990s. But there has been a great deal of experimentation within the region during the past decade. This paper examines the larger economic, social and political context of Latin American pension reform and compares experiences in different countries of the region with options available in Western European societies during the same period. The authors argue that the type of pension reform undertaken in Latin America has been an integral part of the structural adjustment programmes pursued by Latin American governments, under the guidance of international financial institutions (IFIs). Although there was a range of possible remedies to the problems of pension systems in different Latin American countries, neo-liberal reformers and the international financial institutions preferred privatization over all others. They claimed that privatization would be superior to other kinds of reform in ensuring the financial viability of pension systems, making them more efficient, establishing a closer link between contributions and benefits and promoting the development of capital markets-thus increasing savings and investment. And they were able to push through some of their suggestions for reform in spite of considerable opposition from pensioners, trade unions and opposition political parties. Interestingly enough, their pressure proved least effective in the more democratic countries of the region. In Costa Rica, for example, citizens preferred to reform the public system-eliminating the last pockets of privilege for public sector workers and ensuring that new levels of contribution would be adequate to provide minimum benefits for the aged and infirm. In Uruguay, citizens forced a public referendum, through which they rejected a proposal for privatization. At a later stage, they did permit the introduction of private investment accounts, but not at the cost of eliminating the public programme. In Argentina and Peru, after the legislature refused to authorize partial privatization, this was eventually pushed through by presidential decree. Only in Chile and Mexico has there been a complete shift to private pension funds-but, in both cases, influential sectors of the elite, including the military, have been allowed to keep their previous, publicly managed group funds. Looking at the only privatized pension system in existence long enough to allow for some assessment of its consequences-that of Chile-the authors find that many of the claims made by supporters of privatization are not substantiated by the evidence. The first discrepancy between neo-liberal predictions and the reality of Chilean pension reform has to do with efficiency. All previous claims to the contrary, private individual accounts have proven more expensive to manage than collective claims. In fact, according to the Inter-American Development Bank, by the mid-1990s administration of the Chilean system was the most expensive in Latin America. The second disproved claim involves yield. When administrative costs are discounted, privately held and administered pension funds in Chile show an average annual real return of 5.1 per cent between 1982 and 1998. Furthermore high fees and commissions-charged at a flat rate on all accounts-have proven highly regressive. When levied against a relatively modest retirement account, for example, these standard fees reduced the amount available to the account holder by approximately 18 per cent. When applied to the deposit of an individual investing 10 times more, the reduction was slightly less than 1 per cent. The third discrepancy involves competition. Although it was assumed that efficiency within the private pension fund industry would be associated with renewed competitiveness-while the public pension system represented monopoly-the private sector has in fact become highly concentrated. The three largest pension fund administrators in Chile handle 70 per cent of the insured. And to reduce advertising costs, public regulators are limiting the number of transfers among companies that any individual can make. A fourth unfulfilled promise of privatization in Chile has to do with expansion of coverage. It was assumed that the existence of private accounts would increase incentives for people to take part in the pension sc heme, but in fact this has not happened. Coverage and compliance rates have remained virtually constant. A fifth major claim was that the conversion of the public pension system into privately held and administered accounts would strengthen capital markets, savings and investment. But a number of studies have recently concluded that, at best, this effect has been marginal. And finally, the dimension of gender equity within a fully privatized pension scheme is being subjected to increasing scrutiny. Women typically earn less money and work fewer years than men. Therefore, since pension benefits in private systems are strictly determined by the overall amount of money contributed to them, women are likely to receive considerably lower benefits. Public pension systems, in contrast, have the possibility of introducing credits for childcare that reduce this disadvantage. Sweden is an example of countries that have embarked on this course. In the latter part of the paper, Huber and Stephens widen their comparative framework to include recent pension reforms in advanced industrial countries. There, where economic crisis was not as severe and where pressure from international financial institutions was not significant, much broader options for reform were available. In fact, although long-established systems were under stress, no developed country opted for complete privatization. Complex measures were taken to strengthen the funding base of national pension systems, including changes in investment procedures and changes in rules for calculating pension benefits. Reforms also increased retirement age, as well as the number of years required to qualify for a full pension. But even the most thoroughgoing reforms retained a central role for public schemes in ensuring old-age benefits. In conclusion, the authors consider steps that can be taken to craft pension reforms with more desirable results than those obtained to date in Latin America. They recommend measures that address the problem of an aging population by increasing the ability of each generation to pay for its own pensions-rather than relying primarily on the contributions of preceding generations of insured workers. Pension payments should be invested in a variety of financial instruments and benefits must ultimately be related to the yields obtained. Such a strategy does not require introduction of privately managed, individually held, investment funds. On the contrary, risk is lessened by relying instead on collectively managed funds, in which accounts can either be identified with individuals or-more equitably-with generations of contributors. Reformed public pension systems should also contain minimum 'citizenship pensions' that guarantee subsistence income in old age to all individuals as a matter of right. Such a measure, financed from general tax revenue rather than from personal contributions, is not beyond the means of medium income countries in Latin America and the Caribbean. In fact, some Nordic countries introduced citizenship pensions when their GNP per capita was lower than that of most Latin American countries today

Income inequality and redistribution in post-industrial democracies: Demographic, economic, and political determinants

This article analyzes the determinants of market income distribution and governmental redistribution. The dependent variables are LIS data on market income inequality (measured by the Gini index) for households with a head aged 25 to 59 and the percent reduction in the Gini index by taxes and transfers. We test the generalizability of the Goldin/Katz hypothesis that inequality has increased in the United States because the country failed to invest sufficiently in education. The main determinants of market income inequality are (in order of size of the effect) family structure (single mother households), union density, deindustrialization, unemployment, employment levels, and education spending. The main determinants of redistribution are (in order of magnitude) left government, family structure, welfare state generosity, unemployment, and employment levels. Redistribution rises mainly because needs rise (that is, unemployment and single mother households increase), not because social policy becomes more redistributive

Politics, Policies, and Poverty in Latin America

Why do Latin American countries exhibit stark differences in their ability to protect citizens from falling into poverty? Analysis of poverty levels measured by ECLAC in eighteen countries shows that political factors-including the democratic record, long-term weight of left-of-center parties in the legislature, and investment in human capital-are significant and substantively important determinants of poverty. These findings contribute to the growing literature that emphasizes the importance of regime form, parties, and policies for a variety of outcomes in Latin America, despite the weaknesses of democracy and the pathologies of some parties and party systems in the region

Private education and inequality in the knowledge economy

This article explores the consequences of public and private spending on education at all levels, looking at skills and income inequality. We use data for 22 affluent democracies from 1960 or 1995 (depending on data availability) to 2017. High levels of public education spending consistently lower income inequality, both measured as wage dispersion and as the education premium. In contrast, higher levels of private education spending are associated with both higher wage dispersion and a higher education premium. We show that this effect works in part through differential skills acquisition. Public education spending raises the math scores of 15-years old students at the mean and at the 25th percentile, but private education spending has no effect on skills at these levels. We find the same pattern among skills of adults; public education spending raises skills at the 25th percentile and the mean; private spending has no effect. Finally, we also show that higher levels of adult skills indeed depress the education premium

The Chilean Left in Power: Achievements, Failures, and Omissions

In his introduction to this volume, Weyland locates the administrations of Socialist Presidents Ricardo Lagos (2000-06) and Michelle Bachelet (2006- 2010) closest to the moderate pole among current leftist governments in Latin America. We concur and hope to contribute to the discussion by elucidating the sources of this moderation and examining the performance of these governments in the areas of political management, economic policies, and social policies and labor market reforms. The Lagos and Bachelet governments have pursued similar market-friendly economic policies to their predecessors. Although both presidents have made important progress in overcoming the political institutionallegacies of Augusto Pinochet\u27s dictatorship, moderate progress in labor market policies, and impressive progress in two social policy areas, very little improvement has been seen in the realm of fostering citizen participation and empowering labor and social movements through organization and linkages to political parties. We compare the Lagos and Bachelet governments to those of their Christian Democratic predecessors as well as to each other with the goal of identifying policy successes, failures, and omissions. We argue that the administrations\u27 moderation stems from the political experiences of the leadership and their resulting approach to building relationships to the party rank-and-file and to civil society, the fact that these are coalition governments, and the constraints of the Pinochet political and economic legacies

Distribution and Redistribution in Post-Industrial Democracies

This paper analyzes the processes of distribution and redistribution in post-industrial democracies. We combine a pooled time series data base on welfare state effort and its determinants assembled by Huber, Ragin, and Stephens (1997) with data on income distribution assembled in the Luxembourg Income Survey (LIS) archive. In the case of the LIS data, we re-calculate the micro-data in order to remove the distorting influence of pensioners on pre-tax, pre transfer income distribution. We examine the determinants of three dependent variables: pre-tax, pre-transfer income inequality, post- tax, post transfer income inequality and the proportional reduction in inequality from pre to post tax and transfer inequality. We hypothesized that pre-tax, pre-transfer income inequality would be determined by labor market institutions (union density, bargaining centralization), labor market conditions (unemployment), and economic structures (post-industrialism, third world imports). We hypothesized that the reduction in inequality would be determined by political configurations: directly by left government and indirectly via their effect on welfare state generosity by left government and Christian democratic government. Post tax and transfer income inequality was hypothesized to be a product of the combination of labor market variables and political variables. The results broadly confirms our hypotheses and the overall fit is very good

The Welfare State and Gender Equality

This paper examines the determinants of several indicators of economic well being of women. The feminist literature has suggested that women's well being is best measured through both the economic status of women and power relations vis-à-vis men. Barbara Hobson has proposed that the percentage of single mothers in poverty and married women's income as a proportion of both spouses' income effectively measure economic status and power relations. The dependent variables are calculated from micro data available in the Luxembourg Income Survey (LIS) archive, which now contains enough countries and time points to allow multivariate statistical analysis with a sufficiently large number of independent variables to test a broad range of hypotheses on the determinants of gender egalitarian outcomes while controlling for other possible determinants. In the case of poverty among single mothers, the LIS data also allow us to go beyond Hobson's single indicator to investigate the extent to which government action is responsible for poverty reduction. Hence, we analyze 4 dependent variables: 1) pre tax and transfer poverty rates among single mothers, 2) reductions in single mothers' poverty due to taxes and transfers, 3) post tax and transfer poverty rates among single mothers, and 4) women's wages relative to spouses' wages. In these analyses, we test feminist theories along with theories of economic structure, labor market institutions, state structure and political power

The State and Poverty Alleviation in Advanced Capitalist Democracies

We analyze the impact of the state on the incidence of poverty in the working-age population of 14 advanced capitalist democracies between 1970 and 1997 using an unbalanced panel design. We utilize poverty measures based on micro-level data from the Luxembourg Income Study in conjunction with pooled time series data from the Huber, Ragin and Stephens (1997) database. We argue that economic factors including de-industrialization and unemployment largely explain pre-tax, pre-transfer poverty rates of the working age population in advanced capitalist states. These rates, however, are theoretical as advanced democracies redistribute resources through taxes and transfers. We show that the extent of redistribution (measured as poverty reduction via taxes and transfers) is explained directly by welfare state generosity as well as constitutional structure (number of veto points) and the strength of the left, both in unions and in government

Politics and Social Spending in Latin America

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Effects of antiplatelet therapy on stroke risk by brain imaging features of intracerebral haemorrhage and cerebral small vessel diseases: subgroup analyses of the RESTART randomised, open-label trial

Background Findings from the RESTART trial suggest that starting antiplatelet therapy might reduce the risk of recurrent symptomatic intracerebral haemorrhage compared with avoiding antiplatelet therapy. Brain imaging features of intracerebral haemorrhage and cerebral small vessel diseases (such as cerebral microbleeds) are associated with greater risks of recurrent intracerebral haemorrhage. We did subgroup analyses of the RESTART trial to explore whether these brain imaging features modify the effects of antiplatelet therapy