Latin American population aged 65 or over will double in 30 years: What are the challenges for healthcare and pension systems?

Currently, around 8% of the population in Latin America is 65 years of age or older, still well below Europe’s 18%. By 2050, however, this figure is expected double to 17.5%, and to exceed 30% by the end of the century. These data are highlighted in the 2020 Economy and Development Report (EDR) prepared by CAF—development bank of Latin America—, which addresses aging as a widespread, accelerated phenomenon with a significant fiscal impact on the region. The report describes the situation with pension systems and healthcare services, as well as aspects of the labor market that affect coverage and financing.

Public spending on pensions in the region accounts on average for 4.3% of GDP, while public healthcare spending totals 4.1% of GDP. For some countries, such as Colombia and Argentina, projected growth in pension and healthcare spending over the next 40 years could exceed 6 percent of GDP as a result of the aging population.

“In the 2020 EDR, we project the effects that aging will have on social protection for the elderly, but we also find that the informal economy is a major threat to the sustainability of that social protection,” explained Pablo Sanguinetti, CAF Vice President of Knowledge. The estimates suggest that labor informality will erode the taxpayer base almost as strongly as the aging population over the next 40 years,” he added.

Between 2005 and 2018, labor informality declined in the region, with a drop in the share of wage-earning informal workers by almost 9 percentage points. However, an average 63% of the region’s working population are still active in the informal economy. This outlook has been aggravated by the significant loss of formal jobs as a result of the COVID-19 crisis. The pandemic poses challenges in this area, especially if the labor market is unable to reassign workers who lost their livelihood into quality jobs, thus forcing them to take refuge in informal, low-wage jobs.

Another relevant global trend for social protection is the progress, albeit at different paces, in the digitalization and automation of production processes. Technological advances can help replace workers with machines or digitalize routine tasks, increase productivity in non-routine tasks, and expand opportunities for new activities. These advances have an impact on the provision of social protection as they affect careers and wage distribution. On the other hand, technological change can foster the development of non-traditional working modalities with a different tendency to contribute to social protection systems. An example of this is online jobs, which according to the 2019 CAF Survey (ECAF), are a source of income for 1 in 10 working people in the main cities of the region.

expand infographic

Pensions

Taking as a reference the average replacement rate for OECD countries, which stands at 59%, countries with distribution regimes in the region are generally above that average, and therefore would not have problems in funding their systems. Replacement rates of capitalization regimes, on the other hand, are well below the OECD average, pointing to potential funding problems.

“The design of pension systems in the region should follow three general guidelines, which are independent of whether the systems have a capitalization, distribution or mixed structure. First, the elderly population should have an adequate minimum income.. Second, the contributory component of pensions must be financially balanced in order to be sustainable. The third guideline concerns more specific aspects of pension system design with a special focus on incentives for contributory schemes offered by different systems as a way to increase coverage and contributions,” Sanguinetti added.

Healthcare

Advancing better integration of the different healthcare subsystems that will reduce the quality and benefit gap between them is a challenge for most countries in the region. The development of expense control mechanisms and efficient use of funds, prevention policies and the development of healthcare policies are key factors in improving the performance of healthcare services and their fiscal sustainability.

The 2020 EDR highlights that it is not all about spending more. On the contrary, there is significant margin to increase efficiency in healthcare spending in most countries in the region. Results show that effective coverage could be increased by an average of 10.6 percentage points with the same expenditure. With an average gap of 13.4 points in the coverage rate compared to the OECD average, that means that nearly 80% of that gap could be closed through efficiency improvements.

Fiscal Sustainability

One strategy for successful reforms to achieve the fiscal sustainability in these systems is to use a broad perspective of policies, and to group measures comprising different dimensions of the social protection system. According to ECAF 2019, more than 45% of people favor reforms that combine changes in retirement age, benefit level and contribution rates, than any exclusive option. A common formula is to combine elements that expand benefits with aspects that improve financial sustainability, such as marginally raising the retirement age. Lastly, it is also important to ensure that the state is able to act transparently and swiftly in generating, processing and disseminating the information necessary to devise and implement effective social protection policies.

“In short, policies should aim at promoting formal labor, improving tax collection, expanding coverage of pension and healthcare benefits, and at the same time introducing parametric reforms in contributory pension schemes that are unbalanced in accounting terms. In some countries, the absence of fiscal space means that governments will have to implement reforms that curb spending,” Sanguinetti said.

download the publication