> Posted by the Access to Finance Unit, Multilateral Investment Fund, Inter-American Development Bank
With fertility rates falling and life expectancy on the rise, the world’s population is aging rapidly. And though increasing longevity can be considered a triumph of development, for Latin America and the Caribbean, this rapid aging presents a serious challenge: the population is not financially prepared to support itself during old age.
According to the Inter-American Development Bank’s (IDB’s) book Better Pensions, Better Jobs, by the year 2050 there will be three times as many people over the age of 65 as there are today in the region. However, if trends continue, by this date only one in two seniors will have saved for a pension. This means that about 130 million workers are not saving for their pension.
In response, several countries have taken efforts towards increasing pension coverage to lower-income and vulnerable segments through non-contributory pension schemes. From 1990 to 2013, 13 countries in the region implemented programs aimed at expanding non-contributory pensions. Still, even those that receive pensions are finding their value, generally less than US$10 per day, insufficient to cover their basic needs. This means that current and future generations of seniors will have to rely on alternative sources of income to complement their pensions.
Now when it comes to contributory pension schemes, despite significant structural pension reforms during the early 1990’s, the level of contributions has not altered much. This is particularly true among people operating in the informal sector, in which less than two out of every ten independent workers are saving towards a pension. And if we consider that 47 percent of the region’s active population is informal, and that among the lowest-income quintile this figure climbs to 74 percent, one can grasp just how vulnerable this segment is to entering or returning to a state of poverty during old age.
For over 20 years the IDB’s Multilateral Investment Fund (MIF) has been committed to supporting economic growth and poverty reduction in the region through private sector-led development projects. In recent years the MIF has executed regional technical cooperation programs such as Prosavings and Remittances and Savings in order to increase the access and use of adapted savings products that are tailored to the needs of the lower-income population in several countries throughout the region.
The MIF has also sought to promote a goal-oriented approach to savings in some of its projects, mainly through commitment savings products. These types of products allow clients to establish a savings goal and fix a regular savings amount that aligns with the client’s income reality and can be achieved in a set period of time. Several observations on commitment savings products point towards their capacity to reduce vulnerability and engage clients in financial planning. Similarly, we at the MIF believe that through further innovation, commitment savings can serve as the basis for adapted retirement savings products. Thus, the MIF is currently exploring new ways to further expand long-term savings among informal sector workers that can be used to support them during old age.
Be sure to follow new developments in this field during the course of the year here.
Image credit: Charlotte Kesl / World Bank
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