Pension Reform: Is There a Tradeoff between Efficiency and Equity?
By Estelle James
In the past decade, Latin America has taken the lead in structural pension reform which replaces a publicly managed pay-as-you-go defined-benefit system with a system of privately managed, fully funded defined-contribution accounts supplemented by a social safety net This arrangement is designed to improve efficiency and growth, and preliminary evidence suggest that it has been successful in doing so. But traditional social security systems have been justified on the grounds that they are equitable and redistribute to low income groups. Are we in danger of exchanging equity for efficiency? The author argues that in fact traditional system produce many inequities, both within cohorts and across cohorts. So it is possible for pension reform to improve both equity and efficiency – a win-win situation rather than a tradeoff. The reforms undertake thus far have indeed reduced existing equity problems, but some old equity problems remain and some new ones have been created. The main policy lesson is this: Pension reforms should be carefully designed to improve equity as well as efficiency and growth. Only further empirical analyses will determine whether the redistributional goal has been achieved.
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