Uruguayan President Lacalle Pou prepares Pension Reform

The Uruguayan president will launch this Monday the parliamentary debate for the new pension reform in the country.

The changes are aimed at improving the solvency of the State and deepening private savings as a source of domestic credit.

The ruling coalition in Uruguay, led by President Luis Lacalle Pou, is preparing for the debate and launching of the most important pension reform in the last two decades.

The changes addressed will seek to guarantee the intertemporal solvency of the Uruguayan pension system, considering factors such as the population’s natural aging and the labor supply dynamics.

The main objective will be to preserve the fiscal balance of public finances for the coming decades.

All the changes presented by Lacalle Pou’s bill will purely and exclusively affect those born after 1967.

Those born before that date will have the same powers and obligations established by the current pension system and will not be affected in any way.

PILLARS OF LACALLE POU’S REFORM

1) REORGANIZATION OF THE SYSTEM’S STRUCTURE

Up to now, and since the partial privatization of 1996, the Uruguayan pension system is based on a mixed system where contributors can decide whether to contribute to private fund management institutions or to contribute to the State.

With the reform, the part of the state pay-as-you-go system currently divided into multiple special funds such as the Banco de Previsión Social (BPS), the Police Fund, or the bank, among many others, will be simplified and centralized in a single common system.

A new common pension system will be created for all funds, with the same game rules.

2) TAX REIMBURSEMENT AND GUARANTEE OF CAPITALIZATION

The individual capitalization system will not undergo structural changes, and each contributor will be able to continue choosing where to contribute (as long as the minimum income established by law has been exceeded), but the reform will recognize tax incentives.

The pro-government bill proposes that the discount of 2 percentage points on the Value Added Tax (VAT) that is made for the use of payments through debit cards will be destined to the individual savings account of each person instead of going to the State for collection purposes.

It is a tax refund for the benefit of the contributors to the system.

3) RAISING THE RETIREMENT AGE

The main reform on the solvency of the pay-as-you-go system will be the increase from 60 to 65 years of age, the minimum retirement age.

The transition will be applied gradually, projected to end in 2036.

Thus, a transition scheme is applied between the current and new systems after the reform.

People born up to 1973 will be able to retire at 63 years of age, those born in 1974 will retire at 64 years, and finally, those born in 1975 will reach 65 years of age under the new system.

These changes allow compensating the progressive effect of population aging accumulated to date and projected for the coming years, thus guaranteeing fiscal discipline and the eradication of greater imbalances that could endanger the payment of future pensions.

With information from Derecha Diario