What are the health and pension challenges for Peru and Latin America for the coming decades?

The population of Latin America is relatively young, but it won’t be for long. The proportion of adults over the age of 65 is expected to double over the next 20–30 years, from eight percent in 2020 to 17.5 percent in 2050. In Peru this age group will grow from8.7 to 18.9 percent in the same period, more than the regional average. This data is highlighted in CAF’s 2020 Economy and Development Report (EDR), which addresses aging as a widespread, accelerated phenomenon with a significant fiscal impact in the region. The report presents the status of pension systems and healthcare services, as well as aspects of the labor market that impact coverage and financing.

The report was presented during an online conference (see video) that counted among its participants Peru’s economy and finance minister Waldo Mendoza, as well as CAF representative in Peru Manuel Malaret, AFP Association head Giovanna Prialé, Videnza Consultores executive director Janice Seinfeld, and the principal researcher of GRADE, Miguel Jaramillo.

“It is estimated that people over the age of 65 will account for 20 percent of the world’s population by 2050, compared to the current 10 percent,” CAF representative in Peru Manuel Malaret said. “Peru does not escape this trend or the challenges arising from the need to finance a decent standard of living and from an increasing demand of healthcare services in this growing segment of the population.” Malaret also cited the report as saying that, while the required public policy decisions would generate gradual and long-term benefits, the costs are immediate, making it necessary to encourage discussion to reach a general consensus for the benefit of all. “That's what we are promoting with the report and this activity,” he added.

Economy and finance minister Waldo Mendoza said that healthcare and pensions issues should be “treated separately,” adding that the state’s commitment to the former must be much greater than that of the latter. “The source of a good pension system is planned savings, namely individual (AFP) or collective (ONP),” he added. “If it is not feasible to foster more savings; the discussion about pensions is purely academic.” Mendoza also said that regarding government as virtually the only source of financing for the improvement of the pension system “makes no sense,” adding that the state also has other priority obligations to address.

CAF’s 2020 EDR focuses on the nature of the challenges faced by social protection systems the and public policies proposed to address them. Its primary focus is pensions and the provision of healthcare services for the elderly. Its goal is to provide a comprehensive and in-depth view of both systems, which takes into account the interactions between the demographic structure, the labor market and the factors that determine their financial balance and sustainability. It also offers some keys to building quality and financially sustainable social protection systems for the elderly.

“Peru’s joint financial pension and healthcare deficit is currently around 3 percent of GDP and will grow significantly towards 2065 to almost 7 percent) as people continue to age. From a financing perspective, the country could address these deficits (and additional social safety-net spending needs) by curbing expenditure on contributory pensions of its distribution system through parametric reforms, higher collection of contributory systems through a higher formality rate, and higher overall tax collection,” CAF Directorate of Socio-Economic Research senior economist and co-editor of the reportGuillermo Alves said.

During the panel—which was moderated by CAF chief economist Guillermo Díaz—AFP Association president Giovanna Prialé said that given the structural constraints, such as job informality, governments need to “think outside the box to create new products that promote savings, leveraging digital tools and needs in cities and provinces,” adding that some regulatory improvements are also required.

Videnza Consultores CEO Janice Seinfeld focused on the issue of healthcare. “We need to put ourselves in the shoes of the people by conducting outpatient consultations that promote prevention and early care, as well as improve financing efficiency and implement technological changes to have more timely information to make decisions and reduce costs, among others,” she said.

Finally, GRADE’s lead researcher, Miguel Jaramillo, addressed the issue of job informality. “You have to start by formalizing companies by simplifying regulations on recurring costs in order to make the environment easier to operate,” he said. “It is necessary to change the cost-benefit ratio of formal jobs, especially for small entrepreneurs at the base, for whom there is no appeal in going formal in a context where non-compliance with the law is high.” Jaramillo also added that technological changes can also be leveraged to pursue transactions and invite citizens to comply with the law.