As Dina Boluarte's government is about to enact the reform approved by Congress, progress has been made, such as a minimum pension for the public system, but debatable tools have been introduced, such as the pension based on consumption.
After weeks of uncertainty, the Peruvian government has finally made a statement on the pension system reform approved by Congress at the end of May. “The evaluations do not show a strong pressure on the fiscal coffers of this law. We have not been able to find very large gaps, and I believe that everything is manageable and correctable,” declared José Arista, Minister of Economy and Finance of the Andean country.
It should be noted that President Dina Boluarte has until Tuesday 24 to promulgate the law. We are talking about an approval that would be imminent, due to the favorable position of Minister Arista, shared by consulting firms and other research groups. Under the new pension model, the system of individual capitalization accounts (CIC) and the 10% contribution rate will be maintained. But at the same time, “notional accounts” proportional to the contribution of each retiree will be introduced and will be fully implemented by 2030.
Other important changes target formal independent workers: from 2027 onwards, they will contribute 2% of their income, gradually increasing this amount to 5%. In addition, a guaranteed minimum pension of S/. 600 (US$ 158.3) is established for members of the National Pension System (SNP) who have made contributions for more than 20 years.
If President Boluarte refuses to sign the law into law, maintaining the status quo would be costly for future generations, according to the consulting firm Macroconsult. Under the current model, 97% of members of the Private Pension System (SPP) withdraw 95.5% of their funds. This would weaken the reach of the AFPs in the long term, as pension coverage would fall from 50% in 2024 to 30% in 2070. While for this period, the fiscal cost of the system would reach 0.53% of GDP.
However, Macroconsult predicts that the reform will lead to an increase in pension coverage up to 100% by 2070. On the other hand, the average amounts that senior citizens will receive would rise to S/. 860 (US$ 226.9). Regarding the additional fiscal cost, the consultancy firm estimates it between 0.15% and 0.24% of Peruvian GDP, a lower expenditure that is achieved thanks to alternative mechanisms. However, these changes are far from being definitive in order to achieve an ideal model.
“If one compares the fiscal cost of the new system, it is much lower than that of other countries. The problem is that Peru has high rates of informal employment and what happens is that the budget is spent on the few workers who really contribute to the private pension system. So, that amount will be concentrated on those who are privileged and in reality, we are not doing anything conclusive to ensure that many more people participate in the private or public system,” said David Cuervo, general director of Mercer Peru for AméricaEconomía .
From his perspective, Cuervo believes that the Peruvian pension system will be more sustainable, but will concentrate its expenses on beneficiaries who are far from the most vulnerable populations. Elmer Cuba, an economist and partner at Macroconsult, shares a similar position. “A pension system in Peru where we all earn the same is a major challenge, because here people cannot save 10% of their salary, since salaries are very low and this puts pressure on the State to grant subsidies,” he explained to AméricaEconomía .
The problem of low savings capacity is reflected in the Mercer CFA Institute's Global Pension Index. For example, in the 2023 edition of the ranking, the ratio between Peru's GDP and pension savings fell from 25% to 11% in four years. “In countries where their pension systems are much more robust, we are talking about a savings system of 100 or 75% of GDP. There are cases like Australia or Iceland, where this proportion exceeds twice the country's GDP. Here, by saving only 11%, we produce a fragile system that will be unable to provide basic resources for living,” says Cuervo.
Another of the striking measures included in the reform is the consumption pension. This mechanism allows people who are not affiliated to any pension system or who do not have access to a minimum pension in the SNP to accumulate funds in the SPP through their daily purchases.
Thus, a 1% contribution is established on consumption payments for each fiscal year. It should be noted that this mechanism can only be applied up to a maximum contribution of eight taxable units (UIT) per year. Although in theory, this modality democratizes access to the SPP, the truth is that it is also “regressive.” In other words, it forces people with lower incomes to allocate a greater proportion of their daily expenses to the system. “This consumption pension must be complemented with another reform to break this regressive component,” says Cuba.
For David Cuervo, the consumption pension is an extraordinary measure on paper, but it once again comes up against a Peruvian economy dominated by informal workers.
“Everything we generate in real bills is very scarce. Who is going to consume in the formal market then? People who have the capacity to save. So again we are redirecting efforts to people who are not necessarily the ones who need it the most,” he clarifies. The director of Mercer Peru points out that in practice, more than 70% of the economically active population in Peru will not have access to the consumption pension or only to very specific opportunities.
When reviewing the cases of neighboring countries in a year where pension system reforms have spread, it is worth asking whether Peru could replicate some points. “In the Chilean case, there is already a universal pension that almost reaches half of the minimum wage. Peru does not yet have the fiscal strength to imitate it. The fact that Chile has a low informality rate (28%, according to the INE in 2024) also has a lot of influence because that allows the majority of workers to build their own pension,” explains Elmer Cuba.
Although according to the Mercer report, the most successful pension system in the region is Uruguay's. It is a multi-pillar system, where the State finances as much as it can and then the private sector complements it. An informal labour rate that only amounts to 22%, as well as a growing financial market facilitate the structuring of the system.
On the other side of the coin, closer to Peru, is the recent pension reform in Colombia, a country that used to have problems similar to its southern neighbor. Among the liabilities were competition between the public and private pension systems and little emphasis on vulnerable sectors.
“Here we can learn important aspects of the Colombian reform. First, the need to reach an agreement and create a single integrated pension system. Second, the State is concentrating on populations with between one and two minimum living wages. This is a clear focus on serving low-income people. Furthermore, with what it saves, instead of providing resources to people who are above that limit, it theoretically transfers them to greater public spending on elderly people in poverty,” explains David Cuervo.
In this section, the Peruvian pension reform projects an increase in Pension 65, the program aimed at vulnerable elderly people, to S/. 175 (US$ 46) per month. At the same time, coverage would gradually grow at a rate of 1% per year, but it has not yet been decided whether a conservative or aggressive expansion of the benefit will be promoted.
