Social Security Reform in Central and Eastern Europe: Variations on a Latin American Theme

Article excerpt

The Latin American model of social security reform with individual accounts has been adopted by a number of Central and Eastern European countries. That alternative to a pay-as-you-go system is sometimes advocated as a desirable model for solving problems in developed systems such as that of the United States. This article describes the Central and Eastern European systems and compares them with the Latin American systems.

Summary

After Chile reformed its social security system in 1981, several other Latin American countries and certain Central and Eastern European (CEE) countries implemented the Chilean model, with some variations: either a single- or multi-tier system, or with a period of transition to take care of those in the labor force at the time of the change. The single-tier version consists of individual accounts in pension fund management companies. Multi-tier systems retain some form of public program and add mandatory individual accounts.

Most of the CEE countries did not want to incur the high transition costs associated with the Chilean model. The switch to a market economy had already strained their economies. Also, the countries' desire to adopt the European Union's Euro as their currency-a move that required a specific debt ceiling-limited the amount of additional debt they could incur.

This article describes the CEE reforms and makes some comparisons with the Latin American experience. Most of the CEE countries have chosen a mixed system and have restructured the pay-as-you-go (PAYGO) tier, while the Latin American countries have both singleand multi-tier systems. Some CEE countries have set up notional defined contribution (NDC) schemes for the PAYGO tier in which each insured person has a hypothetical account made up of all contributions during his or her working life. Survivors and disability programs in CEE have remained in the public tier, but in most of the Latin American programs the insured must purchase a separate insurance policy.

Issues common to both regions include:

* Administrative costs are high and competition is keen, which has led to consolidation and mergers among the companies and a large market share controlled by a few companies.

* Benefits are proportionately lower for women than for men.

* A large, informal sector is not covered by social security. This sector is apparently much larger in Latin America than in the CEE countries.

Issues that are unique to some of the CEE countries include:

* Individual accounts in Hungary and Poland have proved more attractive than originally anticipated. As a result, contributions to the public PAYGO system in Hungary and Poland fell short of expectations.

* In several countries, laws setting up the programs were enacted without all the details of providing benefits. For example, in some countries laws must now be drawn up for establishment of annuities because they do not yet exist.

* Setting up a coherent pension policy has been difficult in some countries because of frequent and significant changes in government. This situation has affected the progress of reform in various stages of development.

In general, a definitive assessment of individual accounts in these countries will not be possible until a cohort of retirees has spent most of its career under the new system.

Introduction

Beginning in 1981, Latin America led the world in introducing individual retirement savings accounts intended to complement or replace state-sponsored pay-as-you-go (PAYGO) social security pensions. Many Central and Eastern European (CEE) countries looked to Latin America for models because their own PAYGO retirement schemes were underfunded, despite efforts to modify them. In the late 1990s, some CEE countries began implementing various forms of individual accounts. This article concentrates on the CEE experience with such reforms and provides some comparisons with the Latin American model. …