Costa Rica, a pension reform strategy by World Bank

By World Bank

"Early retirement and lax eligibility for incapacity are undesirable for the economic system simply because they lessen exertions productiveness and the provision of skilled employees, and they're undesirable for the method simply because they impose a heavy monetary burden that makes it nonsustainable." Costa Rica is at a turning element with appreciate to its social protection method. whereas part the workforce is roofed and beneficiaries have fared good long ago, the pay-as-you-go (PAYG) pension process is unsustainable for the long run. This booklet describes the current pension procedure, its shortcomings, and defends the necessity for pressing reform. It additionally makes tips on the best way to reform the approach, what could be replaced first, and precisely what components of the pension procedure can be changed.

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25% for state Capitalization scheme starting 1995 Benefit Formula = 80% of the average of the 48 highest monthly salaries over the last 60 months, with maximum pension equivalent to university lecturer that has worked 30 years, full-time. 25% for state Main shortcomings of the system: systemic problems Financial nonsustainability The financial nonsustainability of the social security system is the problem that has received most attention from the government, in Costa Rica as in other countries.

Contributory schemes. The Special Pension Scheme paid from the National Budget (Regimenes Especiales de Pensiones con Cargo al Presupuesto - Law 7302) covers public sector workers (in 1995 - 4,194 active and 16,986 pensioners) vested in 19 special systems merged by law in 1992. 25% Government (the remaining balance of the pension expenditures is borne by the national budget). The National Pension Office Dirección Nacional de Pensiones of the Ministry of Labor and Social Security administers the program.

That is, promised lifetime benefits far exceed expected lifetime contributions. This problem is exacerbated by special regimes for selected occupations, by a benefit structure that encourages evasion after 20 years of participation and by low investment returns on the funds that have been accumulated in the past. As the population ages sharply over the next 30 yearsdue to falling fertility rates and rising life expectancythis financial imbalance will lead to pension fund insolvency. Unless the sustainability issue is resolved in the near future, Costa Rica faces the prospect of failed promises and sharply rising contribution rates just as a large proportion of its population is ready to retire.

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