Morales, The Social Security system that works

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Seguro Social
Photo by the Caja de Seguro Social.

The retirement system that works is the solidary one

by Richard Morales

The debate over Social Security pensions is political rather than technical. Its future, rather than a figure, depends on answering a question that is far from a number and places us in the realm of humanity: How do we want to live tomorrow? It doesn’t happen the other way around. It doesn’t start by discussing how to pay, but rather what we need to pay. A life? An old age? A prosperous old age?

For decades, Panamanians supported a retirement that met the basic needs of life. There is a social consensus that every person who has sacrificed their life time working should be guaranteed an adequate income until their last days. Currently, in the debate over the future of the CSS there are two alternatives: a solidarity system — we all support each other — or one of individual accounts — each person is responsible for their own future.

Let’s start with individual accounts. These do not guarantee a retirement. They provide savings and a minimum return. The experience in countries such as El Salvador, Chile, Poland or Kazakhstan is that they pay 20-30% of your salary. However, this system creates a thriving business for those who collect commissions for managing the funds, even if they lose their savings through speculation.

The solidarity system, on the other hand, can offer a pension as a right. This model depends on the contributions of the generations that work in the present and that contribute to the retirements of the generations that worked in the past. It is not a proportion of your savings as an individual, it is a pact of solidarity between parents and children, grandmothers and descendants, which transforms a portion of the wealth produced by the collective work of society into a guaranteed individual income in old age. Today you retire with 60% of your best salaries — which is insufficient, but it is superior to individual accounts.

The sensible thing to do would be to improve pensions, not worsen them. However, the government and business associations are leaning towards their deterioration. At the beginning of the debate, they only want to discuss profitability: reducing costs — that is, pensions — and increasing their potential profits. Therefore, their spokesmen say that solidarity is impossible, that only a system of individual accounts is viable.

It’s a dishonest argument. First, because it relies on the recent crisis of the institution caused by Law 51 of 2005 —which removed contributors from the system — to argue that it is financially unsustainable. It does not discuss the business evasion of contributions, nor the precariousness of the work force after the reforms to the labor code in 1995 — which deepened informality and made it impossible for a large part of the salaried workers, particularly the young, to contribute. Nor does it address the proliferation of special economic zones with thousands of salaried workers who do not contribute. We must talk about history, because there are the causes and also the responsibility of those who today say they are concerned about the institution, but have historically been complicit in the embezzlement.

Second, it is possible to build a modern solidarity system that is financially, institutionally and technically viable for the next century. Only by merging the mixed subsystem of individual accounts with the defined benefit solidarity system would we have sustainability in pensions until 2038, according to the International Labor Organization (ILO). With that time gained, we could — starting from the Panamanian reality and strategic planning for the future — establish the origin of the financial resources according to the contributory capacity of workers, companies and the state, design an institutional architecture with effective and efficient management, establishing the appropriate parametric criteria, in terms of the amount of pensions and periodic adjustments, retirement age, density and number of contributions.

Panamanians do not deserve to grow older being poorer. Let us design an exemplary pension system, one that is supportive, managed in an equitable, sustainable, transparent, effective and highly useful manner, which will allow our final years of life to be prosperous. Let’s make it a reality without impositions, with the participation of all.

Richard Morales is an economics professor at the University of Panama and ran as an independent for vice president in last May’s elections.

 

 

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