Controversy plagues El Salvador’s pension system

El Salvador’s government has proposed changes to the country’s pension system, which has led to heated debate.

The privately held pension system would be changed to one that’s managed by both private and public entities.

This debate has led people to discuss income inequality and protection of the informal sector (which is the part of the economy that isn't monitored by the government or taxed), but most of the conversation has been devoted to the cause of the reform, a fiscal deficit.

To understand why the reform is so controversial, we need to understand how the pension system in El Salvador has evolved.

Before 1998, when the current pension system was enforced, there were three main institutions where Salvadorians contributed a percentage of their income and the funds collected were maintained in a single account.

These institutions were:

1) The Salvadorian Institute for Social Safety (ISSS), where any formally employed citizen would contribute a percentage of their income to receive low cost benefits from the national health system;

2) The National Institute of Pension for Public Employees (INPEP), where public servants contributed to their pension and health care; and

3) The Institute of Social Prevention for the Armed Forces (IPSFA) where any employee or member of the Armed Forces contributed a percentage of their income for their retirement and health care.  

The three institutions were established around 1983, only three years after the civil war had begun. While this was a significant step toward securing a social net, the policies around their implementation began to consolidate a fiscal deficit. It was impossible for these institutions to repay pensions, or to guarantee good quality health care services. Employees contributed too little for what they were intended to receive.

El Salvador also had to deal with the added financial burden of the war. In 1992, the government proposed a new pension system to address this issue. The new reform stated that pensions would be managed by the private sector. The pensioner’s funds would be invested in order to increase profitability on interests and give better pension payments. After years of debate, the reform was finally implemented in 1998.

The new model, called the Pension Savings System (SAP in Spanish), allows the pensioner to benefit only from their contributions during 30 years of work for men and 25 for women, according to LaPagina.

The government gave some people the option to stay in the old system, for others to change to the new system, and for younger contributors adoption was mandatory. The SAP would pass into the hands of the Pension Fund Administrators (AFP in Spanish).

In the midst of this transition, several decrees tried to merge benefits of the old and new systems. The people who opted to retire through SAP were promised to retire as if they had done it through the old system -- with a robust, lifetime pension.

As these workers retire, the state's obligations and debt grow. In 2016, $4.027 million worth of debt was incurred because of the pension system, an amount that rivals the annual budget for the government to operate.

This is one of many factors that burden the government with a fiscal deficit. When the government proposed that the pension system be placed under the management of the state, people reacted negatively.

Contributors to the AFPs are afraid that the government will decrease debt by using money saved for retirement.

Different civil institutions and think tanks have concluded that in the unlikely situation that the government shows responsible administration of funds, the reform will be efficient in the short term.

In the long term, the worker’s pension will be less than expected in the best-case scenario, if it exists at all. In that case, new reform would be necessary and the cycle would begin again.

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