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What Venezuela’s economy needs #2: Pension Reform

By Miguel Octavio

08.12.04 | The need for pension reform is critical for the finances of the country. I already addressed this issue in part in September in a post entitled “The untouchable pensions”. But let me start at the beginning:

The Venezuelan Government employs an inordinate amount of workers. There are somewhere around 1.8 to 2 million public workers in the both the central and regional Governments and this does not include PDVSA or the universities, who are treated separately. Clearly in a country of 25 million people where half the population is under eighteen this is a remarkable number. As an indication, the central Government in Japan has 800,000 employees, a country with 125 million people and a much older profile than Venezuela’s.

Civil service regulations only apply to the central Government. The military, universities, the Central Bank and municipalities all have autonomy for their own regulations. If you are a civil servant, you may retire at almost full salary after age 60 or 30 years of service. Moreover, your salary receives full inflation and merit adjustment based on increases approved for active workers. This is all funded from the institutions budget. Its impact was not felt until the 90’s when many of these institutions, Ministries and the like began to have three decades in existence. The Minister can also give pensions by “grace” something which is done regularly whenever they want to get rid of someone in a position from which she or he can not be fired.

Then there are other institutions, all of which have separate regulations, some of which allow retirement as early as with fifteen years of service. As an example, a General retires with full salary and his salary will be adjusted to that of a fully active General every time the military receive a salary increase. The same with positions such as the President of the Central Bank. The pension of a retired President of the Central Bank is equal to the basic salary of the current President of that Institution. Same with someone who retires as a member of the Board of the Central Bank. There are dozens of these people around since many are appointed near retirement or even afterwards and their periods are only three years. Note that this makes these positions quite to retired people as any appointment to an important position implies an increase in their pension the day they leave.

Another interesting case is the universities. You can retire after 25 years of service and if the University paid your graduate work, those years count too. Thus, many retire as early as 45 years of age. Moreover, if you die, your full pension is transferred over to your widow. I know of cases where someone was hired at 21 years of age, worked thirty five years for the University, died at 70 after remarrying to a younger woman who is now sixty and entitled to his pension. If she lives to be eighty years old, the University acquired a responsibility for 103 years when it hired that young professor so many years ago. In fact, this is a close relative. No country can foot the bill for such a system.

Remarkably, PDVSA is an exception to all of this. The system is complicated to explain in detail, but basically, it has a pension paid by the company, which is seldom adjusted up and a voluntary contribution plan. I heard recently a former President of one pf PDVSA’s affiliates who retire in 1980 that is PDVSA pension is Bs. 300,000 or $120 a month. Thus, PDVSA paid and pays well, but its pensions are actually quite crummy.

Recently, I saw a study that in five institutions, PDVSA, the military, the Central Bank and two others I don’t remember, pensions take up 4% of GDP, up from 1% when Chavez became President.

Clearly, this is unsustainable. In 1998, then Minister of Planning Teodoro Petkoff, now Editor of Tal Cual brokered an agreement between the unions, companies and the Government to start pension funds in which workers would contribute part of their income. After a transition period of ten years, in which new contributions would fund the retirement of the older workers with current rules, people, would retire later only with whatever they contributed to the fund and the investment gains it gained, a la Chile.

The regulations for pensions would be strict requiring either 60 years of age or 35 years of service, I would have made it stricter with 65 years of age or 35 years of service for everyone in the country. Such a fund, would not only alleviate an important funding problem the Government has with its generous pensions, but would also provide a huge pool of savings which could be used by the Government itself to finance its activities. These funds would buy Government paper, competing with banks and forcing banks to lend more than they do rather than investing in Government paper as their main source of income.

The pension reform was actually approved in 1998 and Chavez stopped it. Basically, the law allowed for the private or public management of the funds with workers having a choice and being able to transfer them from one to the other. Chavez and his Government objected giving it to private managers, even if heavily regulated. Chavez promised a review of the law in six months, then six more and hen the final six. This was four years ago. Nothing has been done since on such an important matter. Why? Simple, the commission appointed by Chavez was full of the same academics who would lose their easy pensions after only twenty five years at the universities. In fact, one of them even argued he was resigning from the Government to be able to complete his twenty five years. Such principles!

Sadly, it took nine years to approve a bill that would have been critical to the restructuring of the country, but it took only months for Chavez to stop it. The bill had almost all of the elements required. It should be revived and implemented. If not, the financial health of the country is in peril, to the detriment of the poor, since it is the Government who is funding these excessive pensions and perks.

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