Thursday, December 06, 2007

Pensions in El Salvador

For the large numbers of Salvadorans who live on what they earn in the informal economy, retirement and a pension are a largely impossible dream. A paper published earlier this year by the Institute of Social Studies in the Netherlands explores the reality of pensions and retirement savings in El Salvador. The abstract for the paper states:

This paper explores obstacles and opportunities to expand social protection for informal workers in El Salvador.

It rules out the short-term possibility that old-age social protection in El Salvador will be expanded through social security measures. Workers are entitled to pension only if they fulfil certain minimum requirements that are out of reach for the majority.

Instead, micro-finance institutions (MFIs) are proposed as an alternative to social protection. This is in part because the MFIs have taken the initiative to start a dialogue on micro-pensions. A few issues however have to be taken into consideration. The most important one is the lack of experience that MFIs in El Salvador have in managing savings, since they have focused more on micro-credit. Capturing savings requires institutions to be regulated and to incorporate additional functions in order to perform and operate with minimum risks to deposits. Moreover, earning trust to get credit is not equivalent to earning trust to capture savings.

7 comments:

El-Visitador said...

Nancy Elizabeth Argueta Joya gets bonus points for a well-written paper and an over-enthusiast abstract. However, she acknowledges the crude reality is on page 46:

«How likely is it when
entitlement to a minimum pension is not real even to others with more capacity to save? Can small savings amounts be really converted into annuities to grant pensions if there are no subsidies to support and increase a fund, and when there are even difficulties to grant pensions to formal retiring employees?
»

Ouch! Even if all of the legislative, social, and cultural barriers she describes over 50 pages are breached, the truth of the matter is that tiny savings cannot generate decent annuities, no matter how sexy and trendy the term "micro-finance institution" sounds to overpaid U.N., Eurocrat, and Worldbank employees.

The problem is, at bottom, economic. As long as the country remains unindustrialized, unmined, under-roaded, and under power-planted, most people won't be able to generate sufficient wealth to save for old age.

- * -

By the way, she only mentioned en passant and rather aseptically the recent ARENA theft of 30% of people's AFP savings. And she never mentioned that AFP savings are horrible moneypits because the remaining 70% cannot be meaningfully invested in equities. Instead, most of it goes into IOUs for future taxation. There is little genuine investment.

Somehow she didn't tie this lack of returns into why people avoid the whole tortuous (and thereby ruinous) government AFP concoction.

Anonymous said...

I was there in 97 when the heavy marketing for "AFPs" were out, It was a total joke and one could see it was the rich business class exploiting all. It was even "mandatory to join" at some jobs.
Salvadorans live for the present, get your check, go to pollo campero or cinemart, and enjoy time with the family. Live hard, work hard, die hard. Arena has always robbed all.
and with U.S. Support.

El-Visitador said...

«It was even "mandatory to join" at some jobs»

Dude, it is mandatory to join if you are any kind of legal employee. Just like they suck cash out of your paycheck in most countries for "social security". Same racket.

But I agree with you, it is a ripoff!

People should be able to get their paycheck free and clear of any government forcibly making you contribute to a government or private pension plan.

Pensions should be strictly voluntary.

inner-self said...

i agree with visitador. el salvador does not even have a system of means to ensure jobs and income for the population while receiving taxes from those incomes at the same time and strengthening itself to undertake pensions per se, or infrastructure or even social programs. el salvador must be industrialized, tourism must be exploited to its fullest potential, and also the financial and commercial sectors must become development poles toward providing salvadoran people with stable jobs and expanding the economy. and yes, pensions should never, ever be mandatory, regardless of where you work, people should plan the rest of their lives ahead of time, and work and invest while they're still young, able and even single or without kids; however, if u want to put money into your own pension fund of course you should also have the right to, but only if it's your call. the bottom line is this, what el salvador needs is jobs, for everyone and with wages the allow you to live in dignity, not luxury, dignity; heavy government investment in improving and mandatorily providing universal public education and even making attending college, in ES or abroad, more accessible to as many as possible.

Anonymous said...

ya el-visitador I guess it was a long time ago, but I remember I just opted out while teaching ESL at Academia Europea in Escalon, I told them to screw it, I think it was AFP ConFIA that was preaching at our agency that time for the business. Maybe I could opt out due to our connections with Despensa Don Juan since we were teaching esl to them and the owner has lotsa connections *)

Bosqué said...

Would it not be better to have the same amount taken for unscrupulous "Social Security" programs out of everyone's check and let people opt to place those funds into a stable value bank account which cannot be used until a certain age? or ...

In cases of natural disasters, a person in the effected area would be allowed to use up to 40% of funds paid into the account for family resettlement and basic needs.

I would like that better than any of the proposed social security rip-offs.

wally said...

It all comes down to governments can't run pension funds nor businesses efficiently. Government run pension funds, in any country, generate piles of money that then cause politicians to salivate over how they can get their hands on it, either for themselves, or for pet projects to keep them elected eternally. In the end either future generations get stuck with the bill or the government defaults or scales back promised benefits. It's not just in Latin American countries, it's as bad or worse in the U.S.