Cover POINT OF VIEW
By Verónica Spross

The challenge of changing the social security system

In Guatemala, social security consists of various programs for people with disabilities, and survival for the elderly (Invalidez, Vejez y Sobrevivencia (IVS), and for state workers. The system has problems which need to be solved as soon as possible. These problems include the following: scarce coverage with only 30% of the work force registered; structural problesms due to the distribution of funds; differences in requirements and benefits depending on the regime to be applied; low pentions; deficient investments, vulnerable income aquisitions and political pressure.

Exchanging social secuirity for a retirement plan which enables each worker have his or her own account, in which he or she may deposit his or her savings for the future and choose the company to manage them, is one of the actions the government will have to consider during his its months in office. This policy was announced by the political party in power and a general view of it was explaind during the debate organized by the Guatemalan Manager's Association (AGG) prior to the elections.

The key to this reform is to change the negative incentives of the distribution system to positive ones which encourage fund raising for retirement. There are four basic points which establish the foundation of the proposed system:

  1. Each worker should have a personal account which enables him to track and understand his savings.
  2. Savings will be managed by private organizations.
  3. The state will have a regulatory and supervisory role to guarantee the system's transparency and to guarantee consistent information for the beneficiary.
  4. The worker must feel free to choose among different options to manage his funds. A global strategy is required for this change, which includes financial aspects and a legal background, to make a transition from one system to the other.

Many times, arguments against reforms in this area have been made public but most of the myths about social security reform have dissapeared with the proven successes in many countries and the appearance of private retirement funds in Guatemala.

Some insist that reforms will have a high fiscal cost, since the delivery of each certificate for the contributions to the old systems must be financed through tax payments. This is only half true, since a fiscal cost will exist with or without the reform.

On a long term basis, availability of funds, to be obtained by the retirement plan reform, will help develop the money market and sustain economic growth in the next decades. The effort to propose a sensible, global strategy will be rewarded by a self-sufficient system offering better retirement options for Guatemalan workers.

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April, 1996