Challenges of pension and health systems

The population of Latin America is relatively young, but it won’t be for long. The proportion of adults over the age of 65 is expected to double over the next 20–30 years, from 8 percent in 2020 to 17.5 percent in 2050. In Ecuador, this age group will grow from 7.6 to 16.2 percent over the same period, similar to the regional average. This accelerated aging, in addition to the high rates of informal jobs and the integration of digitalization into production processes, pose great challenges for the social protection of the elderly in the region.

These challenges were addressed in the presentation of the report “EDR 2020: The pension and health systems of Latin America, the challenges of aging, technological change and informality,” prepared by CAF—development bank of Latin America—, which featured leading experts on the subject in an online event.

During the presentation, Daniel Rivera, CAF representative in Ecuador, said that the report aims to contribute to a necessary reflection on policy alternatives that lead to better social protection for the population. “The effects of the current pandemic will have consequences on labor markets, fiscal accounts and the health of Latin Americans, and thus, it becomes much more important to have a combination of instruments that promote growth, productivity and the creation of formal jobs, which are indispensable factors for the construction of fairer, equitable and sustainable social protection systems.”

Guillermo Alves, CAF’s chief economist and presenter of the report, cited figures of interest that depict the outlook of health and pension systems. According to the EDR, in addition to the demographic challenge, there are factors in the labor market, such as informality, which accounts for 63% of the active population in the region, and 71% in Ecuador. Regarding the effective coverage of health services, almost 25% of Ecuadorians (regional average is 26%) have difficulties accessing essential health services such as reproductive care, maternal and child health and care in case of infectious diseases, even with formal coverage in some of the subsystems.  As a result of aging, the overall deficit of the pension and health systems, which in 2015 reached 3.5% of GDP, is expected to exceed 9% of GDP by 2065.

In addition to the presentation of the report, a panel of experts was set up featuring Augusto de la Torre, director of the Center for Economic and Business Research (CIEE) of the University of the Americas; Rodrigo Ibarra, executive president of Actuaria Consultores; Paulina Durango, Deputy Minister of Labor and Employment; Carmen Corral, constitutional judge; moderated by Sergio Guerra, chief economist at CAF.

During the panel, Carmen Corral noted that the technological changes in work environments will see a steady trend in the post-pandemic era and, therefore, pension systems must propose reforms that adapt to the new realities, within the constitutional rule.

In addition, Augusto de la Torre referred to the sustainability of the pension system, citing that a decade ago, Ecuador kept eight contributors for each retiree, while today, the ratio is 5 to 1, and expected to drop to 3 to 1 in the future. Therefore, noted De la Torre, it is important to manage a real diagnosis with sensible projections to size the problem, and to build a reform proposal through dialogue and with legitimacy, which shakes off poverty in old age, reforms current distribution schemes and seeks the creation of individual savings.

Paulina Durango cited the “Law on the Creation of Opportunities” that the government presented a few days ago in the National Assembly, and which includes a parallel system to the current, 80-year-old Labor Code. According to Durango, the rigidity of the current law does not allow more stakeholders from the economically active population to enter the formal labor system. Flexibility is required, but without affecting acquired rights, he said.

Lastly, Rodrigo Ibarra explained that the average pension amount in Ecuador is USD 590, which is a large amount with respect to the contribution salary, and that currently does not match the demographic evolution that the country is experiencing. He noted that it was important to assess the relevance of subsidies, and if necessary, to reach low-income people; therefore, he mentioned the importance of discussing the mechanisms or measures that allow a truly supportive pension and health system.