Ecuador, Pensions Reform Looms as Social Security Deficit Worsens

The need to reform Ecuador’s pension system, managed by the country’s social security institute (IESS), has become increasingly urgent in the face of the coronavirus (Covid-19) pandemic. Without reform, the system’s decline into insolvency will be hastened by the loss of working IESS affiliates due to growing unemployment, and by the crisis in state finances which endangers the government’s obligatory contribution to pension pots. Faced with this prospect, reform measures - most likely an increase in active affiliates’ IESS contributions - are expected soon.
Ecuador Pensions Reform

Ecuador’s pension system is relatively generous, with one of the highest replacement rates in Latin America, granting retiree affiliates over 80% of their last working salary. It is also unusual in that 70% of every pension is publicly financed, with 40% funded directly by the government, and 30% by the IESS, through obligatory contributions by active IESS members. In recent years, however, it has become clear that the pension scheme is becoming increasingly unsustainable, with the number of retirees growing faster than the number of new affiliates.

In December 2019, the IESS revealed that in a best case scenario, the current system would be sustainable only up until 2053. However, should the government fail to keep up its 40% contributions, the system could run into problems from as early as 2023. In May, the International Labour Organization (ILO) issued revised projections in light of the pandemic, predicting that even if the government complies with its payment obligations, the pension fund will run out of money between 2037 and 2040, depending on the speed of Ecuador’s economic recovery.

The impact of the pandemic has been felt by the IESS principally through a fall in the number of active members - possibly by as much as 7%, according to IESS estimates - caused by the loss of jobs in the country due to the pandemic, the government projects that unemployment could rise to between 9% and 10% this year. Furthermore, contributions by active members are likely to diminish in the coming months as a result of the government’s emergency ‘humanitarian support law’, which allows employers to modify the terms of their workers’ contracts, including salaries, thereby also reducing IESS contributions.

In the short term, however, the main cause for concern is the government’s required 40% contribution to pensions, put at risk by the ongoing crisis in public finances. State revenue has been hit by the dual shock of reduced tax revenue (due to economic paralysis during lockdown) and significantly decreased oil export incomes, leaving a shortfall of as much as US$12bn in the state budget. This year, the government is due to pay approximately US$1.5bn into the pensions fund, which Economy & Finance Minister Richard Martínez has said may have to be paid through the transferal of state assets to the IESS, indicating the gravity of the government’s liquidity difficulties.

In these dire circumstances, pension reform has become all the more imperative. On 25 June IESS president, Jorge Wated, revealed that the institution is analysing increasing obligatory contributions from active affiliates, either incrementally or at a fixed rate, in order to reduce the deficit. The government is also searching for a stable source of revenue in order to guarantee payment of its 40% contribution in future. President Lenín Moreno recently revealed that a proposal to redirect mining revenue into pensions is under consideration. Decisions are expected in the coming weeks, but in the meantime, job losses (and therefore decreased IESS contributions) will only continue to exacerbate these problems.