How Latin American Governments Favor the Old

July 25, 2017

In economics it’s known as a demographic windfall—when, in the course of a nation’s development, diminishing birth rates mean fewer hungry mouths to feed relative to the number of young people in their working prime, with still comparatively few retirees living off the country’s reserves.

It’s a dynamic that should be paying big dividends in Latin America today: Fertility rates in the region have fallen by more than half in the last 30 years, while 15- to 24-year-olds make up more than 20 percent of the region’s population for the first time in history.

But Latin America’s window for demographic-driven economic growth is closing quickly, and the region has yet to make the most of its opportunity. Part of the reason is that, despite rising youth unemployment and dwindling productivity, governments still spend too much meeting obligations to the old and too little investing in the young.

It starts with pensions. Some of the largest economies in the region dedicate an excessive share of their budgets to pensions and other benefits for the elderly, leaving the young with a smaller piece of the pie.

Uruguay and Brazil clearly stand out, as their public pension expenditures exceed by far the Organization for Economic Cooperation and Development (OECD) average of about 8 percent. Argentina is slightly above the OECD average as well, while Mexico spends about the same as the United States (6.9 percent).

Lower rates for countries like Peru and Bolivia are also misleading, since they usually just mean lower coverage rates for the eligible age group. If these countries were to try to raise their coverage rates, public pension spending would likely increase to levels seen in Argentina, Brazil and possibly Uruguay.

Nor is current public pension spending particularly effective. Coverage is distributed unevenly across income levels, with higher-salaried and higher-skilled workers benefitting the most. The lack of pension coverage for low-income workers, especially those employed in the informal sector, has prompted some countries in the region to introduce pensions for the elderly—even if they never contributed to the pension system in the first place. These pensions are financed from general government revenues, and they cost, on average, about 0.5 percent of a country’s GDP (with widespread variations). Although they serve a critical role in reducing old-age poverty, these pensions further divert resources from Latin America’s youth—resources that could be spent on preventive health care, social programs or, especially, tools to access the labor market.

Read full op-ed on the Americas Quarterly website.