Pension savings have a positive impact on the Dominican economy

The pension savings managed by the Dominican Pension Fund Administrators (AFPs) have had a significant impact on the country’s economic growth. If one analyzes the period from 2003 to 2019 there is evidence of that. According to available data, this savings represented on average 22% of the country’s economic growth during that time.

This means that, out of every 5 percentage points of annual economic growth, approximately 1.13 points are attributed to the contribution of pension funds. Compared to other Latin American countries, the Dominican Republic has experienced significant returns on its pension funds. During the same period, the country achieved a real return of 7.5% and a nominal return of 11.0%, outperforming several of its neighbors in terms of return.

In detail, El Salvador had a real return of 3.5% and a nominal return of 4.2% in those two lustrums or a decade. Panama had a real return of 4.2% and a nominal return of 5.1%. Peru had a real return of 4.2% and a nominal return of 7.2%; Chile had a real return of 4.1% and a nominal return of 7.3%; Colombia had a real return of 4% and a nominal return of 8.27%.

Meanwhile, in Mexico the real profitability was 4.2% and nominal 8.2%; Costa Rica had a real profitability of 7.3% and nominal 9.7% and Uruguay achieved a real profitability of 3.3% and nominal 13.7%, according to a study by the firm Novaster, whose president is Diego Valero.

These are significant achievements in the field of pensions that speak positively of the system; a system that still faces several important challenges or areas for improvement. Law 87-01, which created the current pension system, established ambitious objectives that, to date, have not been fully achieved due to certain non-compliances and obstacles.

With names and surnames

One of the main challenges is the coverage of the system, which seeks to increase the sufficiency of pensions and reduce labor informality. Approximately 55% of the labor force is in the informal economy, which limits their ability to save and participate in the pension system.

To address these challenges, several pension system reforms have been proposed in the Dominican Republic. Some of these proposals include increasing contribution rates, implementing a voluntary and collective savings system, facilitating the mobilization of funds for migrants, and adjusting the retirement age progressively according to life expectancy.

In addition, the creation of a longevity insurance is proposed to guarantee life annuities in old age and to balance replacement rates between men and women. These reforms seek to make the pension system more sustainable, equitable, inclusive and efficient, also integrating health protection and universality.

It is important to note that these proposals have an economic impact and associated costs, but aim to improve the financial security of citizens in their retirement.

The topic of pension systems was addressed in the course “How to understand pension systems” developed by the Fundación General Universidad de Salamanca-Novaster for a team of journalists from the Dominican Republic. During the course, the challenges and possible solutions for the pension system in the country were discussed in depth.

One of them – a key one – refers to the fragmentation of the system, with the coexistence of pay-as-you-go systems, which often depend on the public treasury. This fragmentation has raised doubts about the long-term sustainability of the system.

The rate of informality in the labor market is high, reaching 55%. This affects the ability to save for retirement, as informal workers often earn less and face difficulties in contributing to the pension system.

The average wage level of current contributors is 1 to 2.5 minimum wages, and more than 40% of contributors earn less than 1 minimum wage, which directly impacts the replacement rate (RR) they receive in retirement.

The RR is essential to understand the level of financial security offered by the system. With 20 years of contributions, the TR is 31%, while with 25 years it is 42%. However, the current average TR is only 30%. Several reforms have been proposed to address these challenges. One of the proposals is to increase contribution rates to the system.

An external view

In Mexico, for example, the contribution was increased from 6.5% to 15% of the base contribution salary in order to improve the adequacy of pensions.

The implementation of gradual contribution is being considered to allow informal workers to join the system.

This measure seeks to increase coverage and, with it, the average TR.

The possibility of increasing the retirement age has been proposed as a way to improve the TR. Delaying the retirement age by one year could generate a 2% to 3% increase in the TR. l

Longevity Insurance and taking away contributable salary.

Another proposed measure is to eliminate the maximum contributable salary limit, which currently stands at 20 national minimum wages. This could increase the collection of the system by 1%. It has been suggested to implement collective and voluntary pension savings systems in order to increase pensions. These systems would allow workers and employers to make additional contributions. The mobilization of funds for migrants is another area of interest, which would allow members who emigrate to withdraw their funds and take them to their new country of residence. Similarly, those returning to the country could incorporate their capital into a local AFP.

The creation of a Longevity Insurance is a proposal that would guarantee life annuities in old age.

Source: Elcaribe.com

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Dominican Republic Live Editor

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