By Solange Berstein*

The “tsunami of longevity” will be one of the most resounding concepts of 2016 when discussing the sustainability of pensions. This fact was confirmed during the last edition of the World Pension Summit developed in La Haya, Holland, the event that gathers experts in pensions from different latitudes, particularly from developed countries. Considering the demographic transition that several countries face, mostly in Europe and the United States, the image of “tsunami” aims to emphasize the “necessary urge” to study and work on the issue of an ageing population.

Undoubtedly, financing pensions becomes a huge challenge if you have to give coverage to a larger number of people who are retiring. Especially when considering that they live longer as retirees and that, simultaneously, there are fewer active workers, hence fewer contributor to pensions’ financing. According to Eurostat statistics from January 2014, in the 28 European countries, for every 10 persons in working age there were almost three persons older than 65 years old. In Latin America, there is one retired person for every 10 persons in working age, but we are expected to reach Europe’s levels in 50 years (Data CEPALSTAT, 2015).

This challenge has threatened the solvency of the traditional pension systems financed through intergenerational transferences (today’s workers finance the already retired generations). And to face this, developed countries have turned to different options, such as increasing the retirement age, changing the formula to calculate benefits, raising the contribution rates and reducing benefits. And, finally, they have turned to the transition using complementary saving mechanisms to finance retirement (OECD Pensions Outlook, 2014).

Challenges for the region

In the case of Latin America, besides the longevity challenge that the pension systems from developed countries face, there is a low level of contributory coverage, associated to the elevated levels of labour informality. The role that pension systems must play in this context is critical. Designs that promote formality and channel subsidies to those who are in vulnerable conditions. Furthermore, channelling these resources to activities that promote productivity is particularly important when thinking about a future ageing population.

The adequate coverage of the longevity risk must be approached from an integral perspective to the pension systems. It is relevant to evaluate aspects such as the level and coverage of non-contributory benefits, formulas that generate incentives to contribute, auditing the payment of contributions, and other topics linked to the coverage of the systems analysed in the book “Better Pensions, Better Jobs” (Bosch, et al 2013). In addition, the efficiency and the level of competition in private industries, regulations to funds’ investments, legal retiring age, mechanisms and incentives for voluntary savings, among others, are also important.

But in a context of growing life expectations, the mechanisms through which benefits are paid become extremely relevant. For a pension systems to fulfil its main goal, paying pensions, it is vital to properly cover the risk of longevity and that the retirement products are destined to the end for which the contribution was made.

Just like in the case of a Tsunami, the first step to face the increase of longevity is to be aware of the existence of the risk. As a matter of fact, the upcoming of the retirement age in a context of longer life expectancy will be a reality for the vast majority of Latin America inhabitants. Consequently, society needs observation systems that enable taking early measures, mechanisms to mitigate risks, and ways to channel solidarity to those who need it.

The rise of longevity it’s a Tsunami that, unlike devastating tidal waves, should be an opportunity. It is up to us to make this happen, instead of facing the lack of capacity to provide a decent life to the elderly population. Looking at the path walked by other countries that have been dealing with this phenomenon will help us identify formulas to be prepared for this phase.

*Solange Berstein is Principal Pension Specialist at the Labor Markets and Social Security Unit of the Inter-American Development Bank (IDB)

Source: Factor Trabajo