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Social Security in Developing Countries$

Ehtisham Ahmad, Jean Drèze, John Hills, and Amartya Sen

Print publication date: 1991

Print ISBN-13: 9780198233008

Published to Oxford Scholarship Online: September 2011

DOI: 10.1093/acprof:oso/9780198233008.001.0001

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Social Security in Latin America and the Caribbean: A Comparative Assessment

Social Security in Latin America and the Caribbean: A Comparative Assessment

Chapter:
(p.356) 8 Social Security in Latin America and the Caribbean: A Comparative Assessment
Source:
Social Security in Developing Countries
Author(s):

Carmelo Mesa-Lago

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198233008.003.0008

Abstract and Keywords

This chapter concentrates on formal social security and its associated issues in Latin America and the Caribbean, and does not deal with programmes included under the broader definition of social security, such as famine prevention, agrarian reform, education, and employment promotion. It explains that a major reason for this exclusion is that the ‘formal’ concept is typical of the LAC countries, most of which rank as middle-income economies according to the World Bank classification. The chapter notes that the majority of these countries are urban, its labour force is mostly salaried, and it is rich in natural resources. It specifies that the term ‘social security’ is used in this chapter in its ‘formal’ sense, which, following the traditional ILO (International Labour Organization) concept covers several programmes such as: social insurances (old-age, disability, and survivor pensions; non-occupational sickness and maternity care, and corresponding monetary benefits; occupational accident and disease care, and monetary benefits; unemployment compensation); national health systems; and provident funds.

Keywords:   social security, Latin America, Caribbean, middle-income economies, World Bank, urban, ILO, social insurance, national health, provident funds

1. Introduction

The term ‘social security’ is used in this chapter in its ‘formal’ sense, which, following the traditional ILO (International Labour Organization) concept, covers several programmes such as: social insurances (old-age, disability, and survivor pensions; non-occupational sickness and maternity care, and corresponding monetary benefits; occupational accident and disease care, and monetary benefits; unemployment compensation); family allowances; social or public assistance (such as pensions for low-income persons not eligible for social insurance benefits, food stamps, and so on); national health systems or public health programmes; provident funds. Even in this conventional sense, social security is much broader than social insurance since the latter is only a part of the former. In addition, there are differences between the two terms concerning historical inception, administration, population coverage, financing, and benefits.

Social insurance, introduced by Chancellor Bismarck of Germany in the 1880s, derives from the employment relationship and has the following features: (1) separate programmes for different social risks (especially occupational risks, pensions, and health care); (2) coverage of the employed, salaried labour-force, especially urban workers; (3) wage contributions made by the insured, the employer, and the State; (4) benefits which tend to be directly related to the contributions; and (5) full or partial capitalization methods of financing (thereafter we call this the ‘Bismarckian model’.

Social security, which began with Sir William Beveridge’s report at the beginning of the 1940s, reflects a series of new principles that promote (1) the unification, under one single administrative or co-ordinating agency, of the diverse programmes of social insurance, along with social assistance, health care (integrating preventive and curative medicine), employment programmes, and family allowances (principle of unity); (2) the standardization of legal conditions for entitlement and the elimination of unjustifiable inequalities among the insured (principle of equality); (3) total coverage of the population, regardless of employment status (principle of universality) and for all social risks (principle of completeness); (4) financing by means of taxation, the provision of minimum but sufficient benefits—not related to contributions— (p.357) and the progressive redistribution of income (principle of solidarity); and (5) the use of the pure assessment financing method.

This chapter broadly covers all thirty-four countries of Latin America and the Caribbean (LAC). Traditionally, Latin America includes the twenty countries which reached independence from Spain and Portugal in the nineteenth century, plus Haiti. The non-Latin Caribbean embraces fourteen countries, which in the second half of the twentieth century became independent from Great Britain, France, and the Netherlands. More data are provided here on Latin America than on the Caribbean, although systematic information is also given on Bahamas, Barbados, and Jamaica. Technically speaking the majority of LAC countries either have compulsory social insurance programmes or are between the social-insurance stage and the more advanced stage of social security. Only a few countries have systems with characteristics more typical of social security than of social insurance. The transition between the two stages is often blocked by structural barriers which only a few countries have been able to overcome (see Section 4.4).

This chapter does not deal with programmes included under the broader definition of social security used elsewhere in this book, such as famine prevention, agrarian reform, education, employment promotion, and so on. A major reason for this exclusion is that the ‘formal’ concept is typical of the LAC countries, most of which rank as middle-income economies according to the World Bank classification.1 The majority of these countries is urban, its labour-force is mostly salaried and it is rich in natural resources. A comparison among world regions (a total of 113 countries) using 1980 data on health conditions (such as crude and infant mortality rates and life expectancy) shows that after the industrialized countries (and developing European countries), the highest average health standards are found in the LAC region, considerably better than the averages for African and Asian regions.2

The LAC region led the rest of the Third World in the introduction of social-security programmes. A comparative study of the dates of enactment of legislation establishing social-insurance pensions and sickness-maternity programmes among 114 countries shows that the industrialized (and European developing) countries were the first to introduce such programmes, followed by LAC: by 1950, sixteen LAC countries had enacted laws on both programmes compared with only three African countries on pensions and two countries on sickness-maternity, and two Asian countries on pensions and four on sickness-maternity.3

(p.358) In most LAC countries there remain large pockets of poor who are not covered by social security of any kind, and the question is whether the formal system can succeed in protecting them. In the least developed countries of the region (for example, Haiti, Honduras), socio-economic conditions and the magnitude of poverty may be more similar to those of most African and Asian countries. In these countries the broader concept of social security might be more suitable because social insurance has been able to cover a tiny percentage of the population only. This chapter, however, concentrates on formal social security and its associated issues.

2. The Historical Evolution of Social Insurance/Security In Lac

This section discusses the forces (pressure groups, the State) behind the inception and development of social security in LAC, and identifies three stages and groups of countries in that historical evolution.4 Each of the three stages of historical inception (to be summarized below), and each of the three groups of countries, roughly corresponds with one of three types of systems distinguished by their degree of social insurance/security development: (1) the ‘pioneer’ countries, which currently either have a social-security system or are very close to it; (2) the ‘intermediate’ countries, which are at different stages in the transition from social insurance to social security (a few have been able to go beyond the traditional Bismarckian model of social insurance); and (3) the ‘late-comer’ countries, in which we distinguish between the Latin American subgroup (with Bismarckian social insurance) and the non-Latin Caribbean subgroup (rapidly moving towards social security).

2.1. Pioneer Countries

In a small group of pioneer countries, which were the most developed (Chile, Uruguay, Argentina, Cuba, Brazil), the social-insurance system emerged at an early stage (during the 1920s), but it did so in a gradual and piecemeal fashion, giving rise to a multiplicity of managing institutions which protected different occupational groups through independent subsystems with their own legislation, administration, financing, and benefits. The State made a financial contribution by introducing specific taxes or through direct budgetary support. Gradually, subsystems were created which incorporated broader occupational groups or labour sectors as well as their dependants, but generally with more scanty benefits and more stringent entitlement conditions. The subsystems made their appearance approximately as follows: first among the armed forces, civil (p.359) servants, and teachers; then among blue-and white-collar workers in transport, energy, banking, communications, and other public utilities (the so-called ‘labour aristocracy’); much later among the mass of urban workers (frequently separated into two large groups: white-and blue-collar); and finally among agricultural and self-employed workers, small farmers and petty entrepreneurs, and domestic servants.

This type of evolution resulted in a stratified social-insurance system, since it acquired a pyramidal structure, with relatively small groups of persons protected by privileged subsystems at the apex and centre and the majority of the population with subsystems providing less protection at the base. There were significant and usually unjustified differences between the subsystems, and the overall system lacked co-ordination. The stratified system had negative effects: legal confusion, administrative complexity, high operating costs, difficulty in establishing a single register and effective control of evasion, obstacles to combining length of service and contributions accredited in various institutions, significant inequalities (for example, in benefits available, entitlement conditions, financing, and so on).

Considerable debate has been going on for more than a decade now about the role of the two main driving forces of social insurance evolution in LAC: pressure groups and the State. The power base of the occupational groups described above lies either in their military strength, their administration of the government, the scarcity of their skills in the labour market, or their union organization. They bring pressure to bear on the State—sometimes in conjunction with political parties—in order to obtain social-insurance concessions. Studies of various countries in the region show that, in general, the more powerful the pressure groups are, the greater the extent to which they enjoy earlier and more comprehensive coverage, more generous benefits, and more advantageous means of financing. The State may not be a mere passive receiver of pressures from groups. It may also exercise its own initiative by using social security as the instrument to co-opt, neutralize, and control those groups in order to maintain some sort of social order.5 That form of development in which the role of the pressure groups has been preponderant is typical of populist and democratic-pluralist political systems, such as those in Chile and Uruguay during the first seven decades of the twentieth century. Development in which the State plays a preponderant role is more typical of political systems with authoritarian and corporatist inclinations alongside populist features, such as those in Brazil under Getulio Vargas and Argentina under Juan Perón. In practice, both forces (pressure groups and the State) have worked hand in hand in both types of political systems and it is sometimes difficult to determine which was predominant.

(p.360) As economic development, urbanization, unionization, and political mobilization processes advanced in the pioneer countries, the groups which lacked protection gained enough power to secure coverage within already existing or new subsystems. In some countries, they were even able to acquire some benefits that had been reserved for the old systems, thereby achieving some extension of privileges to the masses (what I have called ‘massification of privilege’). The costs of universalizing coverage, and of providing generous benefits and liberal entitlement conditions, became excessive and provoked first actuarial and then financial imbalances in many subsystems. (An actuarial imbalance, in funded systems, occurs when the reserves plus the projected revenue are insufficient to meet the projected expenditures within a given period of time, say, twenty years; a financial imbalance, in any system, occurs when current expenditures in one given year are higher than revenues, thus resulting in a deficit.)

Social-insurance reform, promoted by national and international technical studies, advocated the unification and uniformity of the subsystems and the elimination of costly privileges. But the recipient groups were so powerful that the State was compelled to postpone reforms, sometimes for decades. The political changes that occurred in these countries during the 1960s, 1970s, and 1980s reinforced State power vis-à-vis the pressure groups (which in many cases were disbanded or had their power significantly reduced) and facilitated the process of reforming social security.6

In some countries (Cuba, Brazil), virtually the entire system was unified. In others (Argentina, Uruguay) a central integrating or co-ordinating agency was formed which combined different organizations under a uniform system. Finally in one country (Chile) some measures were taken to make the old system uniform and eliminate most privileges, but above all a new system was created, strongly influenced by private insurance and favouring individuality and multiplicity.

2.2. Intermediate Countries

The second stage in the evolution of social insurance took place in countries whose main systems were established after the 1940s and were influenced by the new trends inspired by the International Labour Organization and the Beveridge Report, which sought to avoid the problems created in the pioneer countries. At the time, some of the countries in question were relatively developed (Mexico), but most of them had a low level of industrialization and in almost all of them the rural sector predominated over the urban sector. In these countries, a general managing agency was established which was responsible eventually for covering the entire population, although at the start the system was limited to the capital and the main cities.

(p.361) In the more developed countries of this second group, before the establishment of the general managing agency there had been a number of social-insurance institutions which protected the most powerful pressure groups: the armed forces, civil Servants, teachers, and energy and railroad workers (Colombia, Costa Rica, Mexico, Paraguay, Peru, Venezuela). Furthermore, in some countries (Mexico, Costa Rica) a number of exceptions were made after the general managing agency was created, to establish separate subsystems for certain groups (almost always in the public sector). However, these groups were usually small and (except for the armed forces and civil servants) represented only a small percentage as compared to coverage under the general managing agency.

In any event, although there is a certain degree of stratification in all these countries, it has never approached the level it reached in the pioneer group. Because social insurance was introduced later in this second group, and also because of its relative unity and uniformity and its lower coverage of risk and population, these systems generally did not face the administrative and financial problems of the first group and therefore no radical changes were needed. Even so, the countries heading this group (those with the highest coverage, growing maturity of the pension programme, and high costs) are now beginning to face the financial problems typical of the first group.

Costa Rica is a special case within this group, because its system was introduced in the 1940s, but it achieved virtually universal coverage at the end of the 1970s, and its costs became similar to those of the countries in the first group even though its pension programme has still not fully matured.

2.3. Late-Comer Countries

Lastly, we can identify ä third group of countries, the so called ‘late comers’, which also have relatively unified social-insurance systems but to a greater degree than those of the second group. Within this group there are two different subgroups. First there are the least developed countries of the region: Central America (except for Costa Rica and Panama) and the Latin American Caribbean (except for Cuba). In this subgroup, social insurance did not generally appear until the 1950s and 1960s, and the general managing agency covers virtually all the persons insured (although the armed forces and sometimes civil servants have separate subsystems); population coverage is very low and sometimes limited to the capital city and the most heavily populated cities. These countries are not usually faced with short-and medium-term financial difficulties, and their main problem is to extend coverage to the population at large.

The other subgroup consists of the non-Latin countries in the Caribbean which achieved independence in the 1960s and 1970s. In the former British colonies, a national health system was usually introduced prior to independence, (p.362) but social insurance programmes were created after independence. In spite of their newness these programmes reached universal coverage about the 1980s. As in the first subgroup, these programmes are highly unified and relatively solvent financially.

Although in general the unification process has advanced in the Latin American region, there still remain systems where this process has not been completed or where stratification remains. Furthermore, the integration of the health institutions (social insurance, the ministry of health, and so on) and their policies is urgently needed in the majority of countries.

3. Trends and Typology of The Levels of Social Insurance/Security Development In Lac

In 1983–4 a comparative study was made of social security among the twenty countries of Latin America (Mesa-Lago 1985 ft) and the major findings are summarized in Table 8.1. Three sets of countries are identified, following the scheme outlined in the preceding section, and based on eleven variables with data from 1980. The fourteen Caribbean countries were not included because they have a different historical evolution and social security model, and also because of a lack of sufficient data on all of them. Notice that the ranking is not a measure of performance of the systems (that is, it does not necessarily reflect their quality) but indicates their level of social security development; furthermore it provides a picture of overall trends in the region.7

3.1. Trends

Generally, the higher a country is ranked in Table 8.1: (1) the older the pensions programme (column 1); (2) the higher the percentage of the total population and the economically active population covered (columns 2 and 3); (3) the higher the contribution as a percentage of payroll (column 4); (4) the higher the social-security expenditure as a percentage of GDP and government expenditure (columns 5 and 6); (5) the higher the proportion of social-security expenditure devoted to pensions (column 7); (6) the greater the financial imbalance (column 8); (7) the higher the ratio of pensioners to contributors (column 9); (8) the higher the percentage of the population who are aged 65 and over (column 10); and (9) the higher the life expectancy at birth (column 11). An exercise of multiple correlation among the variables produced positive correlation coefficients between one another, suggesting that social security has developed in such a way that progress in one variable tends to be accompanied by progress in the others.

Table 8.1. Ranking of Latin American countries grouped according to ťhe degree of development of social security, 1980

Group Countries

Population Coveredb

Social-security expenditure as percentage ofd

Initial pensions lawa

Total

Economically active

Statutory contribution ratec

GDP

National budget

Pensions

Surplus (or deficit) as % of incomee

Ratio: pensioners/contributorsf

Population aged 65 and over

Life expectancy at birth (years)

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(8)

(9)

(10)

(11)

PIONEER GROUP

Uruguayg

6

69

81

33

11

39

79

(60)

0.65

10.4

70

Argentina

6

79

69

46

10

38

55

(13)

0.32

8.2

69

Chile

6

67

62

29

11

32

53

17

0.46

5.5

68

Cubag

6

100

93

10

9

13

44

(46)

0.21

7.3

73

Brazil

6

96

96

26

5

38

45

(7)

0.18

4.0

64

Costa Rica

4

78

68

27

9

36

21

0

0.06

3.6

71

Typical rangeh

6

67–100

62–96

26–46

9–11

32–39

44–79

0–(60)

0.18–0.65

4.0–10.4

68–73

INTERMEDIATE GROUP

Panama

4

50

46

21

7

23

34

(11)

0.12

4.4

70

Mexico

4

53

42

18

3

18

21

17

0.08

3.6

64

Peru

5

17

37

21

3

15

35

12

0.09

3.6

58

Colombiai

4

12

22

20

4

20

20

(8)

0.05

3.5

62

Bolivia

3

25

18

25

3

14

40

8

0.33

3.2

51

Ecuador

5

8

23

21

3

10

48

36

0.15

3.5

60

Paraguay

4

18

14

20

2

22

31

15

0.07

3.4

64

Venezuela

2

45

50

14

3

15

33

26

0.06

2.8

66

Typical rangeh

3–5

12–53

18–50

18–25

3–7

14–23

20–40

26–(11)

0.05 0.15

3.2 4.4

60–70

LATE-COMER GROUP

Dominican Republic

4

8

14

14

2

16

21

4

2.9

60

Guatemalaj

2

14

33

20

2

14

14

3

0.06

2.9

58

El Salvador

3

6

12

12

2

12

18

23

0.08

3.4

62

Nicaragua

3

9

19

16

2

13

16

34

0.08

2.4

55

Hondurasj

3

7

13

14

3

12

7

19

0.02

2.7

57

Haiti

2

1

2

12

1

10

15

3.5

51

Typical rangeh

2–3

1–9

2–19

12–16

1–2

12–16

7–18

3–34

0.02 0.08

2.4 3.4

51–60

(a) Number of decades prior to the 1980s when the first pension law was enacted.

(b) Percentage of the total population covered by the sickness programme and of the economically active population covered by the pensions programme.

(c) Total statutory percentage of payroll to be contributed by the insured person, the employer and the State.

(d) Social-security expenditure includes total health expenditures.

(e) Deficit of surplus resulting from the subtraction of total social security expenditure from total income, expressed as a percentage of income.

(f) Dependency ratio: number of pensioners divided by the number of contributors.

(g) For Cuba and Uruguay, some figures are from 1981, the rest being for 1980.

(h) Calculated by extracting not more than one extreme or outlying variable.

(i) 1979.

(j) 1982.

Source: Mesa-Lago (1985b: 274–5).

(p.363) 3.2. Types or Groups

Data from the previous section and from Table 8.1 allow us to describe the typical patterns of the systems in the three groups.

3.2.1. Pioneer Group

The typical features of the social-security systems of countries in the pioneer group (which are roughly in the first stage of evolution described in Section 2.1) are as follows: the first pension programmes were set up in the 1920s; social security covers more than 60 per cent of both the total population and the economically active population and it becomes practically universal when assistance for the very poor is included; the total contribution rate exceeds 26 per cent of earnings; social-security expenditure comes close to or exceeds a tenth of the gross domestic product (GDP) and a third of the national budget; about half of the expenditure is on pensions, due to the age of the scheme, the maturity of the pensions programme, and very high life expectancy; the pensioner/contributor ratio is very high, rising to as much as 0.6, which means that one pensioner is financed by less than two contributors (this is because coverage has reached a maximum level and the growth rate of the population is low). The system was or is stratified, and its present impact on savings may be negative (the financial technique of the scheme is pure assessment or ‘pay-as-you-go’), but it is probably neutral or slightly progressive in its distributive effects (especially progressive in the health programmes). The system faces a serious actuarial and financial disequilibrium with an in-built tendency to get worse in the future, giving rise to pressure for an overall reform.

3.2.2. Intermediate Group

The typical features of the social-security systems of countries in the intermediate group (roughly in the second stage of evolution) are as follows: the first pension programmes were introduced in the 1930s or 1940s; the system covers between 18 and 52 per cent of the population; the total contribution rate is around 20 per cent of earnings; social-security expenditure is about 3 per cent of the GDP and between 14 and 23 per cent of the national budget; most of this expenditure goes to health programmes, as the countries concerned are in a period of demographic transition and have a high-dependency ratio, whilst only between 20 and 40 per cent is spent on pensions, owing to the relative immaturity of the pension scheme and to lower life expectancy; the pensioner/contributor ratio varies between 0.5 and 0.15 for the above reasons, and because of the scope for extending coverage and high population growth. The system is only relatively unified, as there exist some subsystems independent of the general scheme; its impact on distribution is probably slightly regressive, but its effect on savings may be moderately positive; the system produces an accounting surplus, and for its pension programme it uses the financial technique of scaled premium or assessment of (p.364) (p.365) (p.366) constituent capitals. The system is generally in actuarial imbalance and faces the prospect of financial deficit in the short or medium term.

3.2.3. Late-comer Group

The typical features of the social-security systems of countries in the late-comer group (roughly in the third stage of evolution) are the following: the first pension programmes were set up in the 1950s or 1960s; the coverage of the population is very limited, being less than 10 per cent of the total population and 19 per cent of the economically active population, and is concentrated in the capital and the largest cities; the contribution from earnings is low, between 12 and 16 per cent; social-security expenditure amounts only to 2 per cent of the GDP and not more than 18 per cent of the national budget; some 80 per cent of this goes to health programmes, because of the high population growth rate, and less than 20 per cent to pensions, as the pensions programme is new and life expectancy is very low; the pensioner/contributor ratio is extremely low, between 0.02 and 0.08, for the foregoing reasons, and there is substantial scope for extending coverage and also a very high population growth rate (nevertheless, the ratio is increasing because of the freeze on the extent of coverage of the population). The system is basically unified (except for the armed forces) and tends to have a regressive impact on distribution, but may have a positive effect on savings; it functions with a substantial surplus and the financial technique for pensions is that of the scaled-or general-level premium. At least in the short and medium term, it does not face financial imbalance, but it needs to increase population coverage.

3.2.4. Countries Difficult to Classify

A few of the Latin American countries do not fit perfectly into one single group; rather their variables are split into two groups although with the majority in one. For instance, most of Costa Rica’s variables come within the range of the pioneer group, except for three that belong to the intermediate group: the newness of the pension law (and hence, the low percentage of expenditures that goes to pensions and low ratio of pensioners to contributors) and the youthfulness of its population. The rapid acceleration in coverage of population and risks in the 1960s and 1970s catapulted Costa Rica from the intermediate to the pioneer group.

Although the non-Latin Caribbean countries were excluded from the comparison, a recent study on three of them (Bahamas, Barbados, and Jamaica) indicates some similarities with the Costa Rican system: recent enactment of the pension law, universal population coverage, low ratio of pensioners to contributors, relatively young populations, and high life expectancy. On the other hand, because these Caribbean systems are even newer and their benefits are usually less generous than those of Costa Rica, the former are different: their contribution rates and costs are lower, and most of them have substantial financial surpluses.8

(p.367) An important question is whether, if the present trend of social security does not change, the Latin American countries in the intermediate group and possibly in the late-comer group may face problems similar to those today afflicting the countries in the pioneer group. A satisfactory answer to this question would have required a detailed analysis of all the countries concerned. As this was impossible, the study mentioned earlier (Mesa-Lago, 1985b) thoroughly analysed four countries at various levels of the pioneer group (Uruguay, Chile, Cuba, and Costa Rica) and two countries in the upper part of the intermediate group (Mexico and Peru). These case-studies suggest that the question may well have a positive answer but, to reach a more reliable conclusion, it is obvious that more case-studies of Latin American countries in the intermediate and late-comer groups are needed. Furthermore the application of this model to the non-Latin Caribbean countries could help to answer that crucial question.

4. Coverage of Risks and Population

4.1. Coverage of Risks

The coverage of risks by social insurance in LAC has evolved gradually (as can be seen from Table 8.2). With one or two exceptions, coverage invariably depends on employment. The first risk to be covered was that of occupational accidents and diseases, based on the theory of employer liability. The second risk was that of non-occupational sickness and maternity, but like the previous category this was related to employment; thus maternity care was provided (p.368) only for female salaried employees and workers (the coverage was later extended to maternity of wives or common-law wives of workers, and sickness coverage to some of their dependants). In the non-Latin Caribbean, however, social insurance does not administer a sickness-maternity programme but this is provided under a national health system or public health programme. In Latin America, old-age disability and survivor pensions were established about the same time as sickness-maternity insurance. In the non-Latin Caribbean, pension and other cash benefit programmes were introduced much later. By the mid 1980s all LAC countries (with the exception of Haiti and a few non-Latin Caribbean countries) had these three programmes in operation though they covered the whole population only in a minority of countries.

Table 8.2. Number of countries in Latin America and the Caribbean providing social insurance and family allowance legal coverage of various risks: 1922–1985

Programmes

1922

1932

1942

1952

1962

1972

1982

1985

Social Insurances Occupational accidents and diseases

12

18

23

27

27

29

30

30

Sickness and maternitya

0

1

7

13

17

24

29

30

Old-age, disability, and Survivors

0

2

8

14

17

31

34

34

Unemployment

0

0

0

2

4

5

6

6

Family allowances

0

0

0

1

5

6

7

7

(a) In practically all the non-Latin Caribbean, social-insurance sickness-maternity programmes only award cash benefits, while health care is provided by public-health programmes.

Sources: Based on US Social Security Administration (1985).

The last programmes to come into being were family allowances and unemployment benefits, which exist only in a few countries: family allowances in Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica (this is not a true family allowance programme), and Uruguay; and unemployment benefits in Argentina, Barbados, Brazil, Chile, Ecuador, and Uruguay. In general, the extension of risk coverage has been much faster than that of population coverage. This is due to the fact that priority has been given to vertical extension (risks covered) rather than horizontal extension (population protected): quite often a minority of the population is covered against all risks, but the majority is not protected against any risk at all.

4.2. Legal and Statistical Coverage of the Population

When referring to coverage of the population, one has to distinguish between the legal or statutory and the statistical coverage. The former is what is prescribed by law, but not always in effect; the second comes from estimates of the population protected, which are closer to reality but not always trustworthy. In Latin America generally the social-insurance sickness-maternity programme is the one that has the broadest statutory coverage; in half the countries it covers the entire employed labour force (in some cases, only those employed by others) and in the other half it covers only some employees, usually those in the public sector and in industry, mining, commerce, and financial services. However, in Cuba all residents are covered by the legislation, whilst in Costa Rica and Chile the whole population is covered except those with high incomes who are not working. On the other hand, in the remaining Central American countries and in Haiti the statutory coverage is normally limited to the capital and the larger cities. Only in eight countries does the law protect self-employed persons (compulsorily only in two), but in almost all the countries it covers the dependants of insured persons (normally the wife or common-law wife and children) and pensioners.

In practically all the non-Latin Caribbean every resident has the legal right to public health care. Social insurance provides pensions for all salaried (p.369) employees and wage-earners in all countries, as well as sickness-maternity cash benefits for the same group in all but four countries; the self-employed are compulsorily covered in both programmes in only four countries.

In summary, under the statutory coverage, in most countries those insured are urban wage-earners and their closest dependants, whilst self-employed persons, agricultural workers, and those in domestic service, as well as the unemployed, and their dependants are not covered by social insurance; in addition, in a quarter of the Latin American countries (the least-developed ones) the coverage is limited to the capital and the larger cities.

Statistical estimates of coverage in LAC are affected by multiple deficiencies, which I have described elsewhere. Usually figures on coverage of the economically active population (EAP), or the active insured, are more precise than those of the total population because the latter includes the insured’s dependants who are often estimated in a very rough manner. Table 8.3 provides data on coverage of both the EAP and the total population under the social-insurance sickness-maternity programme including both health care and monetary benefits; for the non-Latin Caribbean only the latter benefits are reported since social insurance does not provide the former; however in most of these countries public health care is reportedly available for practically all the population. Coverage under the national health system or the ministry of public health is not reported in Table 8.3 except for Cuba’s total population and this is the statutory coverage. Coverage of the EAP by the social-insurance pension programme is very similar to that presented in Table 8.3 for the sickness-maternity programme.

Table 8.3. Total and economically active population covered by social insuranς‎e in Latin America and the Caribbean: 1960, 1970, 1980, and 1985 (%).

Countries

Economically active population

Total population

1960

1970

1980

1985

1980

1985

Argentina

55.2a

68.0a

69.1a

79.1b

78.9

74.3b

Bahamas

n.a.

n.a.

85.3

85.9

n.a.

n.a.

Barbados

n.a.

75.3

79.8

96.9

n.a.

n.a.

Bolivia

8.8c

9.0

18.5

n.a.

25.4

n.a.

Brazil

23.1

27.0

87.0

n.a.

96.3

n.a.

Chile

70.8

75.6

61.2

70.0

67.3

n.a.

Colombia

8.0

22.2

30.4

30.2

15.2

16.0

Costa Rica

25.3

38.4

68.3

n.a.

81.5d

84.6d

Cuba

62.6e

88.7f

93.0f ,g

n.a.

100.0f

n.a.

Dominican Republic

n.a.

8.9

n.a.

11.3

n.a.

5.9

Ecuador

11.0

15.8h

21.3

23.4i

9.4

11.1i

El Salvador

4.4

8.4

11.6

n.a.

6.2

n.a.

Guatemala

20.6

27.0

33.1

26.8

14.2

12.9

Honduras

3.7

4.2

14.4

12.8b

7.3

10.3b

Jamaica

n.a.

58.8

80.9

93.2

n.a.

n.a.

Mexico

15.6

28.1

42.0

41.7i

53.4

59.7i

Nicaragua

5.9

14.8

18.9

31.5

9.1

37.5

Panama

20.6

33.4

52.3

56.4b

49.9

58.1b

Paraguay

8.0

10.7

14.0

n.a.

18.2

n.a.

Peru

24.8c

35.6h

37.4

38.0

16.6

18.6

Uruguay

109.0j

95.4a

81.2a

72.4a ,i

68.5

67.0i

Venezuela

11.9

24.4

49.8

54.3

45.2

49.9i

Latin America

n.a.

n.a.

61.2

n.a.

61.2

n.a.

Excluding Brazil

n.a.

n.a.

42.7

n.a.

42.7

n.a.

(a) Coverage in pensions.

(b) Figures for 1984.

(c) Figures for 1961.

(d) Includes coverage of the dispossessed (indigents).

(e) Figure for 1958.

(f) Estimate based on legal coverage and population census.

(g) Figure for 1981.

(h) Figures for 1969.

(i) Figures for 1983.

(j) More than 100% due to multiple coverage.

Source: Mesa-Lago (1987, 1989).

According to the Table 8.3, in Latin America, coverage of the EAP expanded very rapidly between 1960 and 1980 (or 1985) in five countries: about four times in Brazil and Venezuela, and three times in Costa Rica, Mexico, and Panama. Although there is no accurate estimate for Cuba at the end of the 1950s (figures in Table 8.3 refer to sickness-maternity coverage of the EAP), scattered information indicates that health care coverage increased five-to sixfold in that period. Coverage in the Southern Cone was close to universal by the mid 1980s, although the 1960–85 data suggest a decline in coverage in the case of Chile and Uruguay—in the latter probably due to statistical problems—and a significant increase in Argentina. In the three reported countries from the non-Latin Caribbean, universal coverage was reached in a very short period. But in the remaining nine Latin American countries, in spite of some advances, in 1980–5 social insurance covered about one-third or less of the EAP (except in Peru in which coverage has been below 40 per cent but stagnant). In general, coverage is higher in the most developed countries, and in those with the oldest social-insurance programmes.

In the penultimate line of Table 8.3 an estimate is made of overall coverage in Latin America in 1980, which is put at 61 per cent for both the EAP and the total population. There is no doubt that in this respect the region is ahead of (p.370) (p.371) most developing countries and that a group of Latin American countries have reached levels of coverage similar to those of the developed world. Thus in the pioneer countries, and in one or two of the intermediate group, the coverage has been extended rapidly and, if we take into account the protection of the poor (called ‘indigent’) by welfare programmes for health care and pensions, it has become almost universal. But in most of the countries of Latin America social-insurance coverage is very low and there are structural barriers in the way of its extension. A more detailed analysis of Table 8.3 shows that the total coverage of the region is strongly influenced by the very high cover in Brazil, a country which contains more than half of all the insured in Latin America. When Brazil is excluded from the calculations (see the last line of Table 8.3), coverage in Latin America drops to less than 43 per cent of the EAP and the total population; what is more, in about half the countries the coverage is less than one-third and in seven countries it is less than 25 per cent.

4.3. Inequalities in Coverage of the Population

Alongside the problem of low overall coverage, most Latin American countries suffer from inequality in the degree of coverage among different occupational groups, economic sectors, and geographical areas. The coverage tends to be positively correlated with income, the degree of labour skills, and the power of pressure groups.

Surveys carried out in seven countries—Argentina, Costa Rica, Cuba, Chile, Mexico, Peru, and Uruguay—show that the historical appearance of coverage of various occupational groups was largely determined by the power of pressure groups, with a gap of almost 200 years between the first and the last groups covered by pensions: those in the armed forces and civil service began to be covered between the beginning of the nineteenth century and the beginning of the twentieth; teachers between 1880 and 1930; the police between 1890 and the 1940s; the labour aristocracy (public utilities, banks, merchant marine) between 1910 and 1940s; the great mass of the urban labour force (white-and blue-collar workers) between 1920 and the 1940s; agricultural workers between 1930 and the 1950s; domestic servants between 1930 and the 1970s; and the self-employed between 1930 and the 1970s. One has to take account of the fact that in the majority of these countries all groups are covered, although there exist substantial differences in the degree of coverage, in spite of the measures taken in most of them to make it more universal, unified, and uniform. The differences mentioned are much more noteworthy in the countries with low coverage, inasmuch as the majority of the population is excluded from the social-insurance system. A recent analysis for Brazil also shows a positive correlation between coverage on the one hand, and skill and income on the other, with the lowest coverage being found among the (p.372) unemployed, unskilled workers (especially those in agriculture and self-employment), and the lowest income group.9

Information from six countries (Colombia, Costa Rica, Chile, Ecuador, Mexico, and Peru) on the degree of coverage of the EAP in 1979–84, by economic branch, indicates that the highest level of coverage is to be found in the electricity, gas, and water industries (65 to 100 per cent), manufacturing (40 to 90 per cent), and transport and communications (32 to 71 per cent); whilst the lowest is in agriculture (4 to 59 per cent), with the highest percentages being in Costa Rica and Chile (countries where coverage is almost universal). Finally, information from ten countries (Argentina, Colombia, Costa Rica, Chile, Ecuador, Guatemala, Mexico, Panama, Peru, and Uruguay) on differences in the degree of geographical coverage in 1979–84 shows that the States or provinces or departments which are most highly developed (industrialized, unionized, urbanized, having the highest percentage of wage-earners and the highest per capita incomes) are covered to a substantially higher degree than the States, provinces, or departments which are least developed (agricultural, little unionized, rural, with a high proportion of self-employed persons and lowest per capita incomes). Coverage in a particular geographical region varies between 6 and 100 per cent in Argentina, 3 and 25 per cent in Colombia, 54 and 100 per cent in Costa Rica, 39 and 95 per cent in Chile, 3 and 20 per cent in Ecuador, 0.2 and 33 per cent in Guatemala, 17 and 100 per cent in Mexico, 11 and 75 per cent in Panama, 3 and 27 per cent in Peru, and 17 and 69 per cent in Uruguay (Mesa-Lago 1989). With one exception, the province or State or department where the capital is located is the one with the highest coverage.

Those below the poverty line in Latin America are not normally protected by social insurance. The poor are either unemployed or underemployed, are seasonal or temporary workers, or are employed by a relative without pay and therefore not on a permanent full-time basis. They may also be employed, but in occupations not covered in the majority of countries, such as agriculture (especially small farmers, share-croppers, and so on), handicrafts, domestic service, and self-emloyment. PREALC (Regional Employment Programme for Latin America and the Caribbean) has estimated that, in 1980, 33 per cent of the population in Latin America was below the poverty line and that the proportion increased to 39 per cent in 1985. According to Table 8.3, in 1980, 39 per cent of the total population of Latin America was not covered by social insurance and we have seen that, due to the economic crisis, coverage had not increased significandy by 1985. It is not possible to ascertain that the percentage of the population under the poverty line exactly corresponds with the percentage of the population not covered by social insurance. However, analysis of the characteristics of the insured (their income, occupation, and geographical (p.373) location) allows us to conclude that the poor are generally not covered by social insurance, and only have access to public health and social assistance, services usually underfinanced and insufficient. The LAC countries with the highest degree of social insurance coverages are also those that have the lowest proportion of poor, but even in the most advanced countries the percentage of the population uncovered is greater than the percentage of those below the poverty line.10

In summary, the most needy groups appear to be deprived of social-insurance protection in the great majority of the countries; the key question is whether it is feasible to extend coverage to include these groups.

4.4 The Limits of the Bismarckian Model

A number of experts have pointed out that the Bismarckian model of social insurance has not been able to operate satisfactorily in most of the countries in Latin America in spite of the major changes made to the original model. This is due to the fact that in the developed countries of Europe, most of the labour-force consists of wage-earning urban workers, whilst in at least one-third of Latin American countries the mass of the labour force is composed of agricultural workers, the self-employed, and unremunerated family members.11The revised Bismarckian model finances social insurance through contributions from the worker and employer based on the worker’s wage; but in many Latin American countries self-employed persons cannot afford the employer’s contribution; and agricultural workers have low incomes, are scattered, and are frequently migrant, often changing employer.

The first section of Table 8.4 shows that in the most developed countries of the region, wage-earners comprise from 63 to 94 per cent of the labour-force (Argentina, Barbados, Brazil, Chile, Costa Rica, Cuba, Panama, Trinidad and Tobago, Uruguay, and Venezuela) and less than a third of the labour-force works on its own account or as unpaid members of the family. This explains why the Bismarckian social-insurance model has been able to function and extend its coverage in these countries. On the other hand, in the least developed countries (such as Bolivia, Guatemala, Haiti, Honduras, Paraguay, and Peru) from 48 to 70 per cent of the labour force is self-employed or working unpaid for a member of the same family (and a similar proportion are engaged in agriculture). These countries are precisely those which have the lowest social-insurance coverage and it is obvious that the Bismarckian model makes extension of coverage in them very difficult if one goes beyond the limits of the wage-earning labour-force.

Table 8.4. Percentage distribution of labour-force in Latin America and the Caribbean, between 1980 and 1983

Countries

By sector

By Occupational Categorya

Urban

Rural

Wage-earners

Self-employed

Unpaid families

Formal

Informal

Modern

Traditional

Argentina

71.2

25.1

3.2

65.0

19.4

8.8

6.3

Barbados

78.2

9.8

0.8

n.a.

n.a.

n.a.

n.a.

Bolivia

38.2

48.9

9.2

17.9

23.2

5.2

50.9

Brazil

65.3

27.0

5.1

45.2

16.9

9.8

27.6

Chile

66.7

25.3

3.6

54.1

20.1

14.0

8.8

Colombia

53.5

42.5

42.6

22.3

15.8

18.7

Costa Rica

75.2

19.6

3.9

52.9

12.4

19.6

14.8

Cuba

94.1

5.7

0.2

n.a.

n.a.

n.a.

n.a.

Dominican Rep.

51.3

36.5

3.3

n.a.

n.a.

n.a.

n.a.

Ecuador

47.6

37.3

5.8

22.7

25.4

13.7

37.9

El Salvador

59.2

28.2

109

28.6

18.9

22.3

30.1

Guatemala

46.9

42.2

6.7

26.7

17.8

22.3

33.1

Haiti

16.6

59.4

10.4

n.a.

n.a.

n.a.

n.a.

Honduras

45.4

33.3

14.6

n.a.

n.a.

n.a.

n.a.

Jamaica

54.5

41.1

4.4

n.a.

n.a.

n.a.

n.a.

Mexico

b

b

b

39.5

22.0

19.2

18.4

Panama

63.3

23.2

3.6

45.3

20.9

9.1

24.6

Paraguay

36.7

41.2

11.6

n.a.

n.a.

n.a.

n.a.

Peru

45.1

49.1

5.8

35.0

23.8

8.0

32.0

Trinidad & Tobago

80.1

14.6

3.5

n.a.

n.a.

n.a.

n.a.

Uruguay

69.4

23.8

2.0

63.3

19.0

9.5

8.0

Venezuela

64.1

26.5

3.1

62.6

16.4

4.4

15.1

(a) Excludes a small percentage of non-classified workers. The years do not correspond to 1980–3 in Bolivia (1976), Honduras (1977), and Uruguay (1975). No data were available for Bahamas and Jamaica.

(b) The results of the 1980 census are unreliable and give a very high percentage (22%) of non-classified workers.

Sources: The first distribution is based on ILO, Yearbook of Labour Statistics, 1980 to 1985 except Cuba, which is taken from Oficina Nacional del Censo (1984). The second distribution is from PREALC (1981).

(p.374) The second section of Table 8.4 shows the distribution of the labour-force between sectors, using the ILO PREALC method. When the percentage of the EAP in the formal urban sector is compared with the percentage of the EAP covered by social insurance, one notes in most of the countries a very marked degree of correspondence between them. A few countries have been able to extend coverage somewhat beyond the formal urban sector, because they have: (1) social-assistance programmes that provide reduced benefits to the dispossessed not entitled to social-insurance benefits (for example, Costa Rica (p.375) and Chile for pensions and sickness-maternity; Bahamas, Barbados, Cuba, Jamaica, and Uruguay for pensions); (2) national health systems that cover the whole population (for example, most of the non-Latin Caribbean, Cuba); (3) relatively modern and unionized rural sectors entitled to social insurance/ security (for example, Argentina, Costa Rica, Chile, Cuba, Uruguay, and part of the non-Latin Caribbean); and/or (4) special social-insurance programmes (mainly health care) for the poor in large, traditional rural sectors (for example, Brazil, Mexico; see descriptions below). In Colombia and Venezuela, the number covered by social insurance is substantially less than the number in the formal urban sector, indicating that these countries—particularly the latter, which has relatively abundant resources—could make a greater effort to extend coverage, even within the narrow limits of the Bismarckian model. In only two countries (Brazil and Uruguay) does social-insurance coverage exceed the sum of the formal urban and modern rural sectors, which indicates the obstacles that lie in the way of extending coverage to the informal urban and traditional rural sectors. In these two sectors we find self-employed persons and those working without pay for a member of their family, who are typically underemployed and with low incomes, which means that it is difficult for them to finance their own coverage.

Two important models of extension of coverage to the rural sector are those of Brazil and Mexico. FUNRURAL, established in Brazil in the early 1970s, rapidly extended primary health care coverage to the rural sector and small towns, through a network of rural posts, ambulatories, and small hospitals, financed by taxes paid by urban employers and large agricultural producers. COPLAMAR was created in Mexico in 1976 and, through an agreement signed in 1979 with the social-insurance institute (IMSS), expanded health care coverage in the early 1980s to some 13 million people. The infrastructure consists of a network of rural posts and small hospitals, built by IMSS, plus the tertiary-level hospitals of the ministry of health; 60 per cent of the programme is financed by the federal government and 40 per cent by IMSS, while the insured peasants contribute communal work. Unfortunately, these two programmes have been negatively affected by the economic crisis of the 1980s and, in Mexico, part of the IMSS-COPLAMAR facilities and population have been transferred to the ministry of health (see Mesa-Lago 1989).

Recent team research has been conducted at the University of Pittsburgh on determinants of social-insurance (pension) coverage of the EAP in all Latin American countries. Several independent variables were tested and the regression showed that the per cent of the salaried (or wage-earners) labour-force (EAP) explained 0.622 of coverage. A dummy variable ‘political commitment’ was introduced, whose value was one when State initiative was present (for example, through law and direct state action on social security) and zero when it was absent. The best fit was obtained when the salaried labour force and political commitment were regressed jointly, and they explained 0.793 of coverage. In (p.376) this study, salaried labour-force was used as a surrogate of pressure groups, whilst political commitment as representative of State initiative; these two independent variables were seen as mutually reinforcing rather than exclusionary.12 This study confirms, therefore, that social-insurance coverage is mainly determined by the proportion of the labour-force which is salaried. But it also suggests that such a boundary can be overcome by political will in countries with abundant resources (as in Brazil and Mexico). Unfortunately the current economic crisis has apparently arrested or reversed such advances.

4.5. How to Reach the Goal of Universal Coverage

The possibilities of rapid extension of social-security cover seem remote for many LAC countries. Between 1950 and 1980 (years of rapid economic expansion in the region), the formal urban sector grew by more than 14 per cent in the region, but the modern rural sector was reduced by almost 10 per cent. The growth of the formal sector was insufficient to absorb the increase in the supply of labour and in participation rates, together with the intense rural-urban migration and the previously existing levels of underemployment. Capital-intensive methods of production did not help in the absorption of manpower. In the same period, the traditional and informal sectors in the region were reduced by 4 per cent (the traditional sector dropped by almost 10 per cent but the informal sector increased by almost 6 per cent). To reduce the traditional and informal sectors by a third by the year 2000, it was calculated that an annual growth in GDP of 7.5 per cent would be needed. And yet the economic crisis of the 1980s has actually resulted in a negative growth rate in the region (a cumulative variation of 5.5 per cent in 1980–7). Employment in the formal sector declined by 6 per cent in 1980–5, while employment in the informal sector increased by 5 per cent and the rate of unemployment rose by 1 per cent.13 According to Table 8.3, coverage of the EAP by social insurance declined in some countries in 1980–5, probably as a result of the economic crisis.

However, the discussion above should not lead to the conclusion that there is no solution to the problem of coverage. We have mentioned the significant role of political commitment in coverage expansion and have seen that in a good number of countries in the region, coverage has been rapidly expanded in the last twenty-five years thus overcoming, partly or totally, the barriers of the Bismarckian model, as, for example, in Argentina, Brazil, Chile, Cuba, Costa Rica, Mexico, Uruguay, and most of the non-Latin Caribbean. And yet, practically all these countries are among the most developed in LAC and efforts made in less developed countries to expand coverage to the rural low-income (p.377) areas (for example, in Ecuador and Peru) have not achieved significant success.

A specialist has suggested, as a remedy designed to break the barrier, the inclusion of social insurance in an integrated development policy which should include a change-over to labour-intensive methods of production which promote full employment and the satisfaction of basic needs.14 But this approach has been criticized for being unrealistic and not taking into account the heterogeneous nature of the countries in the region and their differing degrees of industrialization, agricultural modernization, and demographic development, or of other development priorities. According to this criticism, universality is possible only in the most advanced countries (Argentina, Uruguay, Chile, Cuba) and perhaps in the near future in countries at an intermediate level of development (Costa Rica, Panama) but not in the others (Leon 1985). Still the suggested integrated development policy, with different priorities, might be more appropriate to the means and needs of the least developed countries to expand coverage even if only by providing of selected, minimal benefits. In any event there is an obvious need to replace the Bismarckian model of social insurance by a new social-security model, which would imply substantial reforms in financing and benefits.

5. Financing Social Insurance/Security

5.1 Sources of Finance

The financing of social insurance in LAC is dependent mainly on contributions based on the earnings (mostly salaries and wages) of insured persons. The law lays down the percentages of contribution payable by the insured person, the employer and, sometimes, by the government (on a tripartite basis as well as in its capacity as an employer). The State also contributes to financing through special taxes or by covering all or part of the deficit in the system, or by granting other subsidies. In the few countries where self-employed persons are covered, they have to pay a contribution based on an estimated income equivalent, at the total rate paid by employees and their employers. Pensioners often have to pay a contribution from their pensions. Another source of financing is the investment income of the reserve funds, mainly of pensions.

As shown in the first section of Table 8.5, by 1985 in fourteen of the twenty-four LAC countries shown, the percentage contribution demanded of the insured is less than a third of the total contribution; in nine other countries, the insured’s percentage varies, between a third and a half of the total; only in (p.378) (p.379) (p.380) Chile is the insured’s percentage greater than half the total percentage. In fourteen of the countries, the insured’s contribution is subject to a maximum or ceiling on wages. The percentage contribution payable by the State is usually small, less than a tenth of the total contribution, but this does not take into account the other sums provided by the State. By law, however, the principal source of financing for social insurance/security is the employer’s contribution, which represents more than two-thirds of the total in fourteen countries and more than two-fifths in seven others (but in Chile only a fifth).

Table 8.5 Financing of Social Insurance/Security in Latin America and the Caribbean by Source: 1980 and 1985

Countries

Legal contributions for social insurance: % of salary (1985)

% distribution of social-security revenue (1980)

Insureda

Employer

State

Insured

Employer

State & taxb

Investment

Others

Argentina

14.0

28.0e

7.8 10.6c

38.4

49.4

10.2

2.0

0.0

Bahamas

1.7 3.4

5.4 7.1

-c

n.a.

n.a.

n.a.

n.a.

n.a.

Barbados

4.6 5.5

4.9 6.0

-c

22.7

28.8

31.0

17.5

oĝo

Bolivia

3.5

20.0

1.5

28.7

53.6

6.2

7.9

3.6

Brazil

8.5 10.0

17.1 19.2

-c

36.9d

53.9

5.0

0.1

3.6

Chile old

24.6 26.5

0.85

-c

20.5

38.3g

34.2

2.0

5.0

new

19.6

0.85

0–0

Colombia

3.8 5.5

14.0 24.0

-c

16.0

49.8

16.2

6.4

11.6

Costa Rica

8.0

22.7

1.5

27.6

45.9

20.4

5.2

0.9

Cuba

0.0

10.0

c

n.a.

n.a.

n.a.

n.a.

n.a.

Dominican Rep.

2.5

9.5

2.5

n.a.

n.a.

n.a.

n.a.

n.a.

Ecuador

9.4

9.8

-c

37.0

43.0

0.1

19.9

0.0

El Salvador

3.2 3.5

7.6 8.2

0.5c

23.4

63.0

0.9

11.8

0.9

Guatemala

4.5

10.0

-c

31.6

53.1

8.2

6.9

0.2

Haiti

2.0 6.0

4.0 12.0

-c

n.a.

n.a.

n.a.

n.a.

n.a.

Honduras

3.5

7.0

3.5

n.a.

n.a.

n.a.

n.a.

n.a.

Jamaica

2.5f

2.5f

-c

17.2

20.7

36.8

25.1

0.2

Mexico

3.8

12.4

l.9

24.0d

50.3

19.7

2.5

3.5

Nicaragua

4.0

11.0

0.5c

21.2

58.0

16.2

2.5

2.1

Panama

7.2

12.4

0.0

28.6

45.1

4.3

9.6

12.4

Paraguay

9.5

16.5

l.5

n.a.

n.a.

n.a.

n.a.

n.a.

Peru

6.0

16.0

0.0

n.a.

n.a.

n.a.

n.a.

n.a.

Trinidad and Tobago

2.8

5.6e

-c

18.2

36.0

26.9

18.9

0.0

Uruguay

12.0 19.0

19.0 24.0

-c

25.1

34.0

38.3

1.5

1.1

Venezuela

4.0

7.0 9.0

1.5

26.8

53.5

6.8

12.7

0.2

(a) Salaried or wage-earner; the self-employed have to pay a much higher percentage.

(b) Includes financing of public health care in countries with national health system.

(c) Budgetary contributions, deficit coverage, taxes, and other subsidies.

(d) Distribution in 1974.

(e) Excludes contribution for occupational risks.

(f) In addition there is a flat contribution.

(g) Since 1981 the employer does not contribute.

Sources: Legal contributions based on US Social Security Administration (1985). Percentage distribution from ILO (1985).

The second section of Table 8.5 gives the most recent statistics (for 1980) available for seventeen countries, covering the distribution of social-security revenue by source. Although the trend is towards an increase in the insured person’s contribution, the statistics confirm what has already been said, although the government contribution appears to be much higher than would be indicated by simply taking the legal percentage (because in most countries, the State contribution is through budgetary allocations or taxes rather than as a percentage contribution based on salaries). In almost every country, the insured person contributes less than a third of total revenue; in three slightly more than a third, but in eight less than a quarter. In thirteen countries, 60 per cent or more of the revenue is contributed by the employer plus the State, and in five countries two-thirds or more. The income from investments is less than a tenth of the total, with six exceptions; but in six countries it does not exceed 5 per cent. All this suggests—on the basis of legislated contribution rates and without taking into account the question of incidence—that the insured do not meet the main cost of their social security and that the situation is more inequitable in those countries which have very low coverage; thus, in Colombia, the coverage of the population in 1980 was 16 per cent, the insured contributed 16 per cent of the revenue, whilst the employer and the State together contributed two-thirds, which suggests a regressive effect in the distribution of the financial burden. To confirm this point, one would need to analyse the incidence of social-security contributions, questioning the assumption of a ‘right’ generated by the insured persons’ payments and the argued need for close correspondence between the ‘premium’ (contribution) and the ‘reward’ (benefit). These assumptions have justified discrimination in treatment as between the users of social insurance and public assistance, and have increased the barrier standing in the way of extending social-security coverage in those countries which have a small employed labour-force. If one questions these assumptions, one opens the way to replacing financing based on salary-related contributions by financing through another type of tax (for example, on income) which could make universal coverage easier and correct other possible negative economic effects of the current type of financing upon employment and/or distribution.

In only a few countries are there transfers from the national budget (or from urban employers) to cover the rural sector. In Mexico, the state contributes (p.381) directly to the operation of the health programme for marginal rural groups (COPLAMAR). In Brazil, the programme of social assistance for health care and pensions which covers the rural sector (wage-earners, self-employed, those working unpaid for a member of their family) is financed by taxes on both the payroll of urban enterprises and the value of agricultural production. In Costa Rica, the State contributes to the health and pensions assistance programme for the very poor (rural and urban) who are not covered by insurance.

5.2 Financial Equilibrium

In a number of countries of Latin America, the financial stability of social insurance is delicately balanced. The pioneer countries, which have the oldest and most highly developed systems, are those facing the largest disequilibrium. These countries have increasing expenditure due to (1) the universal extension of coverage; (2) quite liberal legislation on benefits; (3) a capital-intensive system of curative medicine; (4) pension schemes which have matured; (5) an increasing number of pensioners who are living longer than was envisaged both in the original legislation and in older actuarial estimates, thus receiving their pensions and health benefits for longer periods; and (6) adjustments to pensions and other benefits in line with the cost of living. Social-security revenues in the pioneer countries are becoming proportionately lower for the following reasons: (1) coverage cannot be extended any further (and if it were, it would be to bring in lower-income groups, which would worsen the disequilibrium); (2) the number of active contributors is dropping progressively in comparison with the growing number of beneficiaries; (3) there is a high level of employer’s evasion and delay, particularly in the countries which have high and sustained inflation (where delaying payment means a reduction in the real contribution); (4) the State—under pressure to meet multiple and urgent demands—fails to comply with its financial obligations, thus leading to the accumulation of very large debts; (5) the contribution burden of social security is very heavy and it is very difficult, politically and economically, to increase either social-security contributions or taxes; (6) the yield on pension funds has turned out to be very low, and even negative in the high-inflation countries; and (7) transfers (or ‘loans’) from pension funds to cover deficits in health programmes are difficult to reimburse in practice, which has contributed to the de-capitalization of the funds at a time when it is necessary to use the accumulated technical reserves to meet the current pension payments. As Table 8.1 shows, four of the pioneer countries had financial deficits in 1980, and obviously their actuarial disequilibria were even larger.

As indicated in Table 8.1, most of the Latin American countries in the intermediate group (including Mexico and Peru), and all the countries in the late-comer group, had a financial surplus in social security in 1980. Nevertheless, Panama had a deficit, and an analysis of the situation in Mexico and Peru (p.382) indicates that in 1983–4 there was already either a financial deficit or an immediate threat of one and the situation was worse as regards the actuarial balance of the pension scheme in these two countries. An analysis of the case of Ecuador carried out in 1984 also indicated that there were reasons for fearing financial disequlibrium in the short term and a serious actuarial deficit. A study of Colombia conducted in 1986 showed a financial surplus for the entire system but an actuarial disequilibrium in the pension funds.15 Therefore, the situation of the intermediate group is very mixed, and is less favourable today than it appeared in 1980.

Probably most of the countries in the late-comer group are in the most solvent position (because of relatively new pension programmes, young populations, and low life expectancy); their problem is how to extend coverage beyond a tenth of the total population and a fifth of the economically active population. Nevertheless, their social-insurance systems basically follow the model of the pioneer countries, with the shortcomings described, so that probably they will eventually face similar problems. These countries, however, have more time to change the current model for one which can extend coverage on a more solid financial base. The social-insurance systems in the three non-Latin Caribbean countries also had a substantial surplus at least until 1986, although their situation is not as good with regard to actuarial equilibrium. These countries come close to universal coverage but their pension programmes are very new and health care is not covered by social insurance (Mesa-Lago 1987: 493–5).

The severe economic crisis which has hit the region since the beginning of the present decade has aggravated the financial situation of social security in the pioneer countries but, in addition, it has had repercussions in other countries. The increase in unemployment and the enlargement of the informal sector, the reduction in real wages, and the collapse of firms have led to a drop in social insurance revenue; the pressure of external debt and other urgent domestic needs has obliged many governments to reduce or postpone their contributions even further (in Costa Rica, Ecuador, and Peru, State debt has reached at some points alarming proportions); further, galloping inflation has accentuated the existing tendency to evade and delay payment and has contributed to lower real yields of investment. In addition, in those countries where coverage is almost univeral, many older insured persons (contributors) who have now retired are receiving health care as poor persons (while health costs remain at the same level) or have taken early retirement, and extremely high inflation has made it essential to adjust pensions to some extent in order to avoid their losing all their real value.

(p.383) 5.3 The Financial Techniques of the Schemes

Because of financial disequilibrium, the region—following a universal trend— has been experimenting with a gradual change in the technical method of financing, abandoning full funding and replacing it by other intermediate systems of partial funding and, in some cases, adopting the pure assessment ‘pay-as-you-go’ method. There are three basic financial techniques; the function of all of them is to balance the income and expenditure of the scheme, but over different periods which range from infinity down to one year: the longer the period of equilibrium, the greater the reserves needed.16 The programmes covering short-term risks (sickness-maternity, family allowances, unemployment) generally use the simple (pay-as-you-go) system, under which the period of equilibrium is one year and the reserve is simply to meeting contingencies and statistical variations; in many countries, however, this reserve is insufficient to meet the expenditure. Initially, almost all the pension schemes in Latin America adopted the method of full funding or general level premium. This method aims to maintain equilibrium for an indefinite period (or at least for several decades) by a fixed premium which is calculated actuarially on the basis of estimates of future liabilities (which take into account demographic, economic, and other variables). But this method requires that the benefits are not increased without an immediate adjustment in revenue, that the planned revenue be received in full and on time, that the reserve fund be administered efficiently, and that periodic actuarial valuations be carried out. In practice, political pressures, the lack of administrative control, inflation and rising life expectancy lead to a situation where these requirements cannot be met, thus forcing abandonment of this method of funding. Some countries then adopted the method of funding with a scaled premium and only partial reserves, in which the equilibrium is maintained for shorter periods (for example, a decade), with a premium being established at a fixed rate for each period, but normally being increased in successive periods. This method defers the costs, so that there is a redistribution between generations. It depends absolutely on frequent actuarial valuations and adjustment of the premium for each period in the light of these. But legal inflexibility (in some countries, the contribution is fixed by law) and political opposition, resulting from trade-union and employer pressures, are major obstacles in the way of making such adjustments. In practice, some countries fixed only the initial premium and did not specify the duration of the periods to be covered, they failed to carry out the actuarial valuations, and they did not adjust the premiums. The scaled average premium was in some cases replaced de facto or de jure by the method of pay-as-you-go. But this method, which is based on very short periods, requires even more flexibility in increasing income more frequently which, naturally, is more (p.384) difficult to achieve. A recent survey in this area carried out by the Inter-American Development Bank (IADB) concludes as follows:

The persistence of deficits is the [situation] generally faced by the social security programmes in Latin America financed by the simple pay-as-you-go method, as confirmed in the annual reports and balance sheets of the administering institutions, as well as by numerous studies both national and international; and this is also confirmed by the results of the survey in the countries in our sample.17

Among the pioneer countries, Argentina, Chile (in the old system which still applies to a third of the insured persons), Uruguay, Cuba, and Brazil use pay-as-you-go methods either officially or in practice, with resulting deficits. Once they are no longer able to replace one method of financing by another which postpones the financial costs arising from the system, a number of these countries have to face a serious financial imbalance, aggravated even further by the over-all economic crisis in the region. The country in the worst situation is Uruguay, which in 1983 had a demographic burden ratio of 0.8, in other words, approximately one active insured had to finance one passive person (in contrast, the actuarial calculations of the United States project that, at the beginning of the twenty-first century, the ratio will be two active persons financing one non-working person). If these countries were unable to achieve financial and actuarial balance when the demographic burden ratio was much lower, they will be less able to do so in the future when the ratio will be much higher. To cope with this situation it is necessary to carry out a general reform of the social-security system and some of the countries in the region have already introduced reforms based on widely differing models.

6. Benefits, Other Expenditure, and Total Costs

6.1. Benefits and their Inequalities

Most of the expenditure of social security (from 76 to 97 per cent) is on benefits. Information from the ILO on the distribution of expenditure by programme indicates that the pioneer countries spend a greater proportion on pensions (and family allowances), whilst the countries where social insurance appeared at a late stage spend the largest proportion on the sickness-maternity programme. In 1980, in most of the Latin American countries, more than half the expenditure of social security was on health, and in five countries the proportion was as high as two-thirds. This is partly the result of the demographic changes and the fact that the pension schemes are now maturing. In the non-Latin Caribbean, the percentage spent on pensions is relatively small because of the newness of this programme. Until 1977, public health appeared (p.385) to have the highest percentage of social-security expenditures in these countries, but thereafter data on public health expenditures were deleted in the ILO series. In Bahamas and Barbados, public assistance is paid by social insurance and, since 1978 (because of the deletion of public health expenditures in the ILO series) welfare appears to have the highest percentage of social-security expenditures (ILO 1980, 1985).

The pioneer countries tend to cover all the social risks and to provide a greater number of benefits and more liberal ones. Argentina, Brazil, Chile, and Uruguay are the only countries which cover all risks, including unemployment and family allowances (Cuba does not include these last two schemes). A study of five countries (Argentina, Chile, Mexico, Peru, and Uruguay) based on information from the beginning of the 1970s demonstrated that the older the social-security system, the greater the number of benefits provided. The old systems have granted exceptional and costly benefits such as the long-service or seniority pension (which entitles the insured to retire at any age after a certain number of years at work, thus allowing some people to retire at the age of 45) and the old-age pension with relatively low retirement ages (because they were established by law at a time when the life expectancy was considerably less than now). In these countries, entitlement conditions for health benefits also tend to be more generous: for example, no qualifying period is required, or it is limited to a few weeks’ contributions; a sickness and/or maternity allowance is paid at the same rate as the wage (or very close to it) and sometimes additional benefits are offered such as orthodontics and contact lenses. In these countries, too, there are many so-called ‘social benefits’ such as housing plans, personal and mortgage loans, purchasing facilities, and other recreational, sporting, and cultural services for insured persons and their dependants.

The stratification of social security typical of the pioneer countries (at least until they introduced procedures to unify and standardize their systems) led to considerable inequalities in the benefits because the most powerful groups received more and better benefits than the least powerful. In the study of five countries already mentioned, the legal differences between the occupational groups covered were measured on the basis of six criteria: entitlement conditions; base salary used to compute benefits; amount of benefit; pension cost-of-living adjustment; possibility of obtaining several pensions or combining one pension with a paid job; and time required to process and receive the benefit. The study also compared the availability of health services (hospital beds and doctors per insured person) and their quality for the various groups. The occupational groups were ranked on the following order, from most to least privileged: (1) armed forces, (2) civil servants, (3) the ‘labour aristocracy’, (4) private white-collar employees, and (5) blue-collar workers.

In the Latin American countries where social security appeared late, the principal inequality in benefits is the result of the lower level of coverage: a minority of the population is covered by a number of different benefits—vertical (p.386) extension—whilst the majority who are not covered can use only the public health and social-assistance services, which generally receive a small proportion of the available resources. The non-Latin Caribbean countries appear to have much less inequality in benefits because they have universal coverage combined with unified programmes; however civil servants usually enjoy better pensions than the rest of the insured.18

6.2. Administrative Costs

The administrative costs of social security are much higher in LAC than in the developed countries of North America, Europe, and Asia where they vary between 2 and 3 per cent of total expenditure. According to the first column of Table 8.6, in 1980 the LAC percentages ranged as follows: from 4 to 6.9 per cent in Argentina, Barbados, Panama, and Costa Rica; from 7 to 10.9 per cent in Chile, Uruguay, and Jamaica; from 11 to 14.9 per cent in Peru, Nicaragua, Guatemala, Brazil, Colombia, Trinidad and Tobago, El Salvador, and Venezuela; and from 15 to 27 per cent in Ecuador, Bolivia, Mexico, and Dominican Republic. With very few exceptions the administrative percentages increased from 1977 to 1980. In those countries where social insurance was introduced recently (as in the non-Latin Caribbean) the high percentage of administrative expenditures is partly explained by the need of minimum personnel, equipment, and physical plant to operate the system, combined with low initial benefit expenditures (particularly on pensions); as the latter increase the proportional cost of operation is gradually reduced.

Table 8.6. Indicators of administrative efficiency of social insurance in Latin America and the Caribbean between 1980 and 1985

Countriesa

% of administrative expenses over total expenditures (1980)

Employees per 1,000 insured (1980–6)

Argentina

4.4

n.a.

Bahamas

21.8b

3.8b

Barbados

5.0b

2.4c

Bolivia

19.3

6.7d

Brazil

12.le

n.a.

Chile

7.5

n.a.

Colombia

12.4

7.4b

Costa Rica

6.9

10.5b

Dominican Republic

27.0c

20.5b

Ecuador

17.4d

13.2d

El Salvador

14.0

13.5f

Guatemala

11.7

7.1f

Jamaica

10.4b

0.6c

Mexico

19.5g

7.5 10.4h

Nicaragua

11.6

4.5d

Panama

5.4

11.7i

Peru

11.5j

8.li

Trinidad and Tobago

13.6

n.a.

Uruguay

7.7

n.a.

Venezuela

14.0

4.1f

(a) No data are available for Cuba, Haiti, Honduras, and Paraguay.

(b) Figures for 1985.

(c) Figures for 1986.

(d) Figures for 1982.

(e) Figure for 1977.

(f) Figures for 1980.

(g) Figure for 1983, in major institution only (IMSS).

(h) Figures for 1982, in two major institutions.

(i) Figures for 1984.

(j) Figure for 1981, excludes personnel expenditure.

Source: Mesa-Lago (1989: table 21).

Personnel takes the bulk of expenditures within administrative costs and its importance in each LAC country is measured in the second column of Table 8.6 by the number of employees per 1,000 insured. The enormous social insurance bureaucracy in the Dominican Republic, El Salvador, Ecuador and Mexico largely explains the high administrative costs in these four countries. The ratios of Jamaica and Barbados are much lower than that of Bahamas (all three are ‘late-comers’), explaining the highest administrative costs in the latter.

6.3. The Growing Cost of Social Security

The cost of social security in LAC is growing. According to ILO data comparable for fifteen Latin American countries, social-security expenditures as a percentage of GDP increased between 1965 and 1977 in ten countries and declined in five. The highest percentages for the region in 1977 were equal to that in Japan and approximated that of the United States; in 1971 Chile reached 17.2 per cent, only surpassed by some developed European countries. (p.387) ILO data for 1980 are available for only twelve Latin American countries and indicate a declining trend: increases in the percentages of three countries, stagnation in one, and decreases in eight (see Table 8.7). I have argued elsewhere that methodological changes in the ILO series may be responsible (p.388) for the apparent decline, and I have estimated higher percentages for 1980 than those of the ILO for several countries (see Table 8.1).19

Table 8.7. Social-security expenditures as a percentage of GDP in Latin America (ILO Series): 1965, 1977, 1980

Countries

Social-security expenditures as % of GDP

1965

1977

1980

Argentina

3.2

7.3a

9.4

Bolivia

3.6b

3.1c

2.7

Brazil

4.3

6.2

-

Chiled

12.2

10.1

10.6

Colombia

1.1

3.7

2.8

Costa Rica

2.3

5.8

7.0

Ecuador

2.9

3.0e

3.0

El Salvador

2.2

2.9

1.6

Guatemala

2.0

1.6

1.2

Haiti

0.8

-

Mexico

2.6

3.4e

-

Nicaragua

2.1

2.3

-

Panama

6.0

7.9

6.2

Peru

2.9

-

-

Dominican Republic

2.7f

2.5

2.0

Uruguay

14.5g

10.3

8.0

Venezuela

3.1

4.1

1.3

(a) Figure for 1975.

(b) Figure for 1961.

(c) Figure for 1976.

(d) In 1971 the percentage reached the record level of 17.2.

(e) Figure for 1977.

(f) Figure for 1970.

(g) Figure for 1969.

Sources: ILO (1978, 1981, 1985).

Table 8.7 does not reproduce ILO data for Barbados, Jamaica, Guyana, and Trinidad and Tobago on social-security expenditures as a percentage of GDP. The reason is that, since 1978, medical-care expenditures of public health (which by 1977 took at least two-thirds of total social-security expenditures) were deleted from the ILO series. As a result, the percentage of social-security expenditures over GDP declined by about 60 per cent in 1978 vis-à-vis 1977 in most of those countries. In 1980 the ILO figures for Barbados and Jamaica were respectively 2.3 and 1.4 per cent but, adding public health expenditures (p.389) (as officially reported by those countries to ILO), the proportions rose to 5.5 and 4 per cent indicating an increasing trend in 1965–80 rather than a decline.20

The Latin American pioneer countries, which have the oldest programmes, broadest coverage, and most liberal benefits, have the highest percentages of social-insurance/security expenditures to GDP. Conversely the ‘late-comer’ countries of Latin America, which have the newest programmes, smallest coverage, and usually less liberal benefits, have the lowest percentages. According to Table 8.1, the percentages of social-security expenditures over GDP in 1980 ranged: in the pioneer group from 9 to 11 per cent (except Brazil with 5 per cent); in the intermediate group from 2 to 4 per cent (except Panama with 7 per cent); and in the late-comer group from 1 to 2 per cent (except Honduras with 3 per cent). The non-Latin Caribbean countries have broad coverage (as in the countries of the pioneer group) but their programmes are the newest in the region (newer than in most of the countries of the late-comer group). Based on the ILO series (which underestimate costs) these Caribbean countries could be placed within the late-comer group. And yet my adjusted figures for Barbados and Jamaica place these two countries at the top of the intermediate group, close to the percentage of Brazil.

6.4. The Cost of Reaching Universal Coverage

The cost of extending social-insurance coverage to all the population in Latin America with the current Bismarckian model would not be economically viable in many countries (even if they were able to overcome structural barriers). Table 8.8 shows how social-insurance expenditures over GDP would increase if coverage were granted to the whole population with the current model.21 The estimates in the third column of Table 8.8 were roughly obtained by extrapolating the expenditures for a 100 per cent coverage assuming that such expenditures would increase proportionally with coverage.

Table 8.8. Social-insurance expenditure as a percentage of GDP, in 1980, and extrapolated on the base of universal coverage, in Latin America and the Caribbean

Countries

% social-insurance expenditures/GDP (1980)a

% of total population covered (1980)a

Extrapolation of % of social-insurance expenditures over GDP when 100% of population is covered

Argentina

11.9

78.9

15.1

Bahamas

0.7

85.3b

0.8

Barbados

1.0

79.8b

1.2

Bolivia

2.9

25.4

11.4

Brazil

5.2

96.3

5.4

Chile

11.0

67.3

16.3

Colombia

2.8

15.2

18.4

Costa Rica

7.5

81.5

9.2

Cuba

8.6

100.0c

8.6

Dominican Rep.

0.7

5.9d

11.9

Ecuador

3.7

9.4

39.4

El Salvador

1.3

6.2

21.0

Guatemala

1.6

14.2

11.3

Honduras

0.9

7.3

12.3

Jamaica

0.4

80.9b

0.5

Mexico

2.9

53.4

5.4

Nicaragua

2.3

9.1

25.3

Panama

6.1

49.9

12.2

Paraguay

1.2

18.2

6.6

Peru

2.6

16.6

15.7

Uruguay

8.1

68.5

11.8

Venezuela

1.3

45.2

2.9

(a) Data for Argentina, Colombia, Costa Rica, Dominican Republic, and Ecuador have been updated and are not always the same as in Table 8.1.

(b) Economically active population covered by monetary benefits, the total population is legally covered on health care by public health.

(c) Legal coverage.

(d) Figure for 1985.

Sources: Same as Table 8.3.

While linear extrapolation of current costs and coverage may be useful to establish broad orders of magnitude for the costs of universal coverage in the concerned countries, this may not be an accurate portrayal for a number of reasons. First, it is difficult to establish the effects of joint provisions, such as health care and pensions, as opposed to either of these in isolation. Intercountry comparisons are also difficult since different countries have varying coverage for various programmes. Further, there are two factors which might increase costs of universal provision beyond that implied by linear extrapolation: (i) the (p.390) non-covered population is poor and has a lower health status than the covered population, thus it probably suffers from a higher incidence of sickness and cannot afford private medicine, and hence it might use social-insurance/ security services more; and (ii) administrative costs to cover the informal and rural sectors might be higher than for the covered formal sector because of (p.391) difficulties in detecting, controlling, and collecting from the former. On the other hand, the non-covered population probably has a lower life expectancy than the covered population and hence pension costs of the former could be lower. Finally, in the less developed countries where current coverage is low, most social-insurance expenditures go to sickness-maternity care rather than pensions, hence the net outcome might be higher costs than the simple extrapolation of Table 8.8 suggests.

In spite of these limitations of the exercise, it clearly emerges from Table 8.8 that extension of formal coverage in the region (particularly in the less developed countries) cannot be attained with the present levels of benefit and the current administrative structure, as the financial burden is likely to be excessive (as has happened in some of the ‘pioneer’ countries). Obviously one cannot simultaneously have universality, an excessively generous package of benefits, and very high administrative costs. As we have already said in the sections on coverage and financing, the area of benefits also calls for an overall reform, which must be integrated with the other two aspects of the problem.

7. Conclusions

This chapter makes it clear that the Bismarckian model of social insurance is not suitable for most of Latin America, particularly for the less developed countries. A few countries in that region, the most developed, have been able to achieve universal coverage (or are close to that goal), but at a very high economic cost and in most cases without significantly correcting inequalities in coverage, financing, and benefits. The social-insurance systems of these countries have faced (or currently suffer) serious financial and actuarial disequilibria and the State is no longer capable of subsidizing the deficit, particularly under the current economic crisis.

This situation has prompted reforms of the Bismarckian model. The two most radical reforms have been full statization in Cuba (but without solving the problem of escalating costs) and partial but increasing privatization in Chile (developing a new solvent system but with an enormous increase in the cost of the old system). More moderate reforms have been introduced in Brazil and Costa Rica by extending coverage to rural, urban marginal, and/or the indigent population either with equal treatment of the insured or with a dual system of benefits. Minor reforms applied in Argentina and Uruguay have not been able to correct the previous situation and these two countries are urgently searching for solutions.

The non-Latin Caribbean countries are the latest late-comers in the region but some of them have been able to extend rapidly coverage to almost all of the population. Because of the newness of their pension programmes (and in some cases a more efficient investment of their funds, as in Bahamas) and the (p.392) establishment of health care outside social insurance, these systems are among the most solvent of the region at least for the time being.

Latin American countries at an intermediate level of development of their social-security systems cover less than half of their population and appear to be in better financial shape. A few of these countries were able to extend population coverage rapidly in the 1970s (for example, Panama, Mexico, Venezuela) by covering part of the rural sector, or partly integrating health services, or aided by the oil boom. The crisis of the 1980s seems to have paralysed or slowed down these advances and some of these countries have begun to experience the disequilibria typical of the most developed countries in Latin America.

The least developed countries typically cover less than one-fifth of their populations and, at least until 1980, enjoyed financial stability. But the extension of coverage is limited by both structural barriers and the economic crisis; furthermore the latter has contributed to a deterioration in the financial situation of some of these systems. Finally, if these countries continue in the same path as the pioneer ones they probably will face the same fate.

The prolonged economic crisis of the current decade has precipitated a latent crisis of social security. Revenues have often declined due to an increase in unemployment, informal employment, employers’ evasion, and the State debt, as well as a decrease in real yields of investment and real wages. Real pensions have declined and health services have deteriorated in many countries. At least the crisis has prompted some countries to introduce reforms to curtail unnecessary expenses and excessively generous benefits, and to improve efficiency in administrative and health services. The crisis has also alerted international financial organizations to the crucial economic importance of social security (moving them to include the latter in technical missions and studies) and promoted collaboration among some of them, for example, between the ILO and WHO.

In spite of all these changes, the most crucial dilemma of social security in Latin America and the Caribbean remains unsolved: how to achieve universal coverage with a financially viable and socially equitable system.22

(p.393) References

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Notes:

(1) Out of 21 LAC countries included in the tables of World Development Report 1987, all, except Haiti, are in the middle-income category and, within it, 7 countries rank in the upper middle-income group.

(2) Based on data from UN Demographic Yearbook, 1980 to 1985. For instance infant mortality means (rates per 1,000) were: LAC 66.4, Asia and Middle East 80.7, and Africa 121.1; female life expectancy means (years) were: LAC 63.8, Asia and Middle East 57.5, and Africa 46.6.

(3) Based on data from US Social Security Administration (1985).

(4) For a detailed analysis of these topics, see Mesa-Lago (1978).

(5) A major exponent of the theory that the State is the key force in the evolution of social security is James Malloy (1979). On the role of political leaders and the bureaucracy as major factors, see Rosenberg (1980).

(6) See Borzutsky (1985).

(7) See Mesa-Lago (1985b, 1986).

(8) See Mesa-Lago (1988).

(9) See Mesa-Lago (1978: 265–6), and Isuani (1985: 96–7).

(10) See ‘Poverty and the Social Debt’, PREALCNewsletter, No. 17 (July 1988), pp. 1–2; and Mesa-Lago (1983).

(11) See Arroba (1979) and Isuani (1985).

(12) See Cruz-Saco et al. (1987).

(13) See PREALC (1981: 35–54),ECLAC (1987: l6), IADB (1988:117–34), and Tokman (1986: 535).

(14) Isuani (1985:99–101). a similar position concerning all basic needs is taken by COPLAMAR in Macroeconomia de las Necesdades Esenciales en Mexico: Situacion Actual y Perspectivas al Ano 2000 (Mexico, Siglo XXI, 1983), pp. 105–10.

(15) Mesa-Lago (1985b: chaps. 5, 6), and De Geyndt and Mesa-Lago (1987).

(16) See Thullen (1985), and ISSA (1979).

(17) Arroba et al. (1980: 49). See also (p. 202) the comparison of the technical financing methods of 7 countries, which supports the analysis of this section.

(18) See Mesa-Lago (1978, 1987).

(19) See ILO (1981, 1985) and Mesa-Lago (1986).

(20) Based on ILO (1981, 1985) and Mesa-Lago (1988).

(21) I use social-insurance expenditure in Table 8.8 rather than all social-security expenditures as in Table 8.1, because the former are more statistically precise and better correspond with the social-insurance-covered population, thus excluding the population protected by public-health programmes. The difficulties of statistical estimation of coverage, mentioned earlier, must of course be borne in mind in interpreting the data presented in Table 8.8 for specific countries.

(22) See the final sections on policies in Mesa-Lago (1985b, 1989).