Up to half the middle class in emerging market economies lack pensions despite their increasing wealth as new study says.
A paper by Angel Melguizo head of the Latin American and Caribbean Unit, OECD Development Centre, France warns that the informal nature of many EM economies have left the poor and middle class without coverage.
The paper – Pensions, informality, and the emerging middle class – wants to see incentives put in place for both individuals and companies. Although such measures have a significant upfront cost, they also bring significant long-term benefits.
The paper also suggests that without reform, a big section of the middle class could be plunged back into poverty in retirement and the societies concerned are even risking political unrest.
The paper says: “The deficient scope of pension coverage in emerging market economies is striking. In Latin America, less than half of the 38 million workers aged 65 and older are receiving a pension that is based on their contributions during their working lives.
“A majority of contributory and non-contributory pensions pay less than $10 a day. Therefore, most pension systems are not fulfilling their goals of eliminating poverty in old age and maintaining an adequate standard of living for workers after they stop working.
“Without further reforms, this low coverage will have substantial social, economic, political, and fiscal costs. And the situation is expected to worsen due to the rapid aging of the population and widespread informality.”
The paper notes that some projections say that by 2050 as many as half of the 140 million elderly in the region will not be eligible for an adequate pension.
“People aged 65 and older will make up 20–30% of the electorate in the region, setting the stage for potential political unrest. In fiscal terms, the lack of coverage is a latent, mounting unaccounted-for liability that governments in the region will eventually have to meet.”
High levels of informality
The paper finds high levels of informality among the emerging middle-income working class reflect their occupations. In Chile, Colombia, Mexico, and Peru combined 21 million middle class urban workers with incomes of 50–150% of the median are self-employed or lack a written contract—almost twice as many as have a written contract.
Only in Chile do workers with formal salaried work constitute the largest group, and even there, approximately a third of middle-income workers do not have a signed contract.
That share rises to two-thirds in Colombia, Mexico, and Peru. As a consequence, less than 10% of middle-class workers in Peru, 28% in Mexico, and 39% in Colombia contribute to a pension plan.
The paper suggests that so far decisions taken by government, workers and firms have created an imbalance in pension system contributions and eligibility, in which only a small share of middle-income workers regularly contribute to the pension system, despite having the savings capacity to do so.
It suggests a pensions subsidy should be provided to encourage middle class pension saving. This should be as high as 50% of the contribution for those who can afford to contribute but are otherwise among the lowest paid middle income workers falling to 10% for much more wealthy workers. It says this could require an annual outlay of 0.5 to 1% GDP.
The report adds that while no single pension system reform is appropriate for all countries, a set of key principles apply.
- Universality – understand the interaction of the pension system with the labour market and the tax system
- Integrality – connect all contributory and non-contributory provisions of the social protection system, including retirement, disability, survivors’ pensions, and health and unemployment insurance
- Efficiency – create good incentives for pension saving and formal employment
- Transparency – simplify the rules so they are easily understood by workers and firms
- Innovation – experiment with pension contribution subsidy mechanisms and with savings channels