Archive for January 30th, 2011

Venezuelan Social Security Pensions: Can the country afford them?

January 30, 2011

For the past few years, the Chavez Government has been paying anyone that has worked a minimum of 5 years in their lifetime a Social Security pension equals to minimum salary plus four months of bonus per year. At current minimum salary and assuming the official rate of exchange we are talking about Bs. 1,200 (US$ 279 a month) per pensioner, but each pensioner receives Bs. 19,200 per year, equivalent to US$ 4,465 per year. besides the 5 years of employment, you get a pension when you turn 55, if you are a woman, or 60 years old, if you are male.Additionally, survivors are also eligible to receive 100% of the pension of the deceased.

The Chavez Government and the opposition seem to be in a battle to outdo each other in offering even more benefits. Last year, Chavez lowered the minimum number of payments required for nine months, so that more people could receive the benefit. The opposition in turn, made a proposal during the first week of the new National Assembly, asking that pensioners also receive a 10% increase given to them as food stamps, a benefit that most formal workers receive in Venezuela.

At this point, I have to clarify that these pensions don’t come from a “fund”, Venezuela’s Social Security administration has gone broke at least twice in my lifetime. People pay monthly proportionally to their salary, but there is a cap, the cap is around the payment for a yearly pension, but only those making more than 5 minimum salaries a year pay that much.

What I have never been able to figure out is whether the country can afford this. And as far as I have been able to figure out, ever since the old Economic Committee of the National Assembly disappeared, such calculations are not even made. So, both the Government and the opposition are playing populism without having a clue as to whether this makes sense or not.

So, I decided a few weeks ago to throw some numbers and see if this makes any sense.

My starting pint was the INE website, where I found data on how many Venezuelans are above 55 (for females) and 60 for males. This data can be found here, except that for some weird reason, the 55 to 59 group is missing from the table, so I had to do some extrapolation. The result is that there are 1.2 million women eligible by age to this pension, while 716,000 men qualify. That is over 1.9 million Venezuelans. If all of them qualified, the cost would be US$ 8.6 billion a year to pay all of the pensions.

The next step was to figure out how many of those people, given the low five year requirement and the fact that the pension can be inherited by widows and widowers, as well as underage children, which must be a small group, my guess was that around 50% of that population was eligible and collects that pension. Imagine my surprise when I found out that it is 83% of those eligible that receive the pension!

Well, at that rate, it costs the Venezuelan Government US$ 7.145 billion per year to sustain the pension system. I don’t know how much of this comes directly from those that contribute today to the system, but it sounds high to me. Very high. Because this year’s budget at Bs. 4.3 per US$ is US$ 47 billion, so we are talking about 15% of the budget going for pensions. And this number will simply increase every year as more people get older, unless the Social Security system is funded, a project that Chavez killed when he first became President in 1999.

But the opposition is no less irresponsible when it proposes that pensions should be increased. Without knowing whether the system makes any sense, asking for an increase about the minimum salary is not a very responsible position. Unless both the Government and the opposition begin calculating costs and looking into the future, the country’s finances will always be doomed under the management of irresponsible politicians.

And this does not even consider an even more complex question: Is it fair?