Ecuador presents study suggesting reforms to the pension system
RIO DE JANEIRO, BRAZIL – The government of Ecuador presented this Friday a diagnosis on the Social Security Disability, Old Age and Death (IVM) pension system and suggested reforms that cannot be postponed given its eventual unsustainability in the short term.
The study, presented by the Ministry of the Economy and the Ecuadorian Social Security Institute (IESS), was announced one month before President Lenín Moreno will hand over power to conservative Guillermo Lasso on May 24.
Lasso’s campaign plan suggests “structural reforms” to social security to achieve a fair retirement for workers based on a new regulation. The system of contributions and private savings would be in harmony.
The diagnosis, prepared under the auspices of the World Bank by a team of experts coordinated by the former president of the Central Bank of Ecuador and former economist of the International Monetary Fund (IMF) Augusto de la Torre, will be used to prepare a proposal to reform the Social Security Law on pensions.
These reforms will be submitted to the future president, the Ministry of Economy indicated in a press release.
According to the study, the reform of the pension system cannot be postponed due to multiple factors such as demographic evolution, since there are fewer and fewer contributors and the life expectancy of retirees is increasing.
In addition, the diagnosis points out that the subsidy or state aid provided to the IVM pension system “is inequitable” and “is growing rapidly, driven by a combination of low contributions, high benefits, high maximum pension level, and the steep increase in benefits per year of contribution.”
Therefore, the study warns that “the IVM’s liquid reserves may therefore be depleted in the short term” and render the system “financially unviable and fiscally unsustainable.”
Besides, it maintains that the IVM presents a growing deficit if contributions and benefit payments are compared, so that “it cannot be financed for much longer,” the study mentioned.
Consequently, the study considered that without reform, “the IVM deficit would take a growing slice of tax revenue or reduce fiscal allocations for other priority social expenditures.”
Therefore, it considered that if the government could not transfer to the IESS more than US$1 billion per year in cash, the IVM’s liquid reserves would be depleted in less than two years.
“In conclusion, if the system is not reformed, in 2 to 3 years, it will be tough for the IVM to honor the benefits,” the diagnosis warns.
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