Pension reform in Bolivia: two models of income security in old age

Since the 1980s, two alternative approaches for financing and organizing pensions for older people have emerged across developing regions. These are: (1) contributory schemes, taking the form of capitalized individual accounts, usually managed by private firms; (2) government funded non-contributory “social pensions” provided on either a means-tested or universal basis. Both these approaches are influential in Latin America, where they have often come to replace long-standing defined benefit schemes. Indeed, Chile was a pioneer of the first approach, implementing a reform in 1980, and it continues to be seen as a model for pension reforms in countries as diverse as Nigeria and India. Since the 1960s, Brazil has developed a substantial social pension programme which runs alongside contributory schemes for protected workers. More recently, social pension programmes have become more widespread in Latin America, including new and enlarged schemes in Mexico, Colombia and Argentina. In some countries these two approaches have been developed in tandem, comprising two separate “pillars” of an integrated pension system. Theoretically, social pensions can operate as a welfare safety net for people who fail to accumulate sufficient reserves to obtain a decent contributory pension. Bolivia is a case in point. In 1996 the government implemented a combined reform which saw the conversion of existing schemes into privately run capitalization schemes. At the same time, using finances from the privatization of state-owned enterprises, the government established a new, universal social pension programme: Bono Solidario (Bonosol). Since that time, Bonosol (and its successor Renta Dignidad) has received considerable international attention and is considered by many to be a model of best practice for pension policy in low income countries (Willmore 2007). Less attention has been paid to the new contributory system, but most evaluations are less than positive about its achievements (Fretes-Cibils et al. 2006). This paper compares the effectiveness of Bolivia’s social pension and its contributory system as tools of income security for older people. We focus on several aspects of their performance: coverage of older people, cost and financial sustainability, administrative efficiency and effects on income distribution. The next section summarizes key elements of the two approaches, reviews international experiences and identifies policy challenges. We then provide some relevant context for the Bolivia case study, before examining the performance of each model. Comparing these distinct approaches within a single country provides important policy lessons, particularly for low-income countries. The chapter draws on a wide range of secondary and grey literature, as well as interviews with key policymakers.