COMPARED REGULATIONS SERIES

Contribution Rates and Tax Ceilings

in Countries with Individually Funded Systems[1]

Santiago, March, 2007

EXECUTIVE SUMMARY

In this study we show the contribution rates and tax ceilings in force as of June, 2006, in the new pension systems that have been established in FIAP member countries and the traditional systems that continue to operate in some of those countries. The study was performed on the basis of information provided directly to FIAP by its members in the respective countries. We also recurred to the Web pages of some pension fund manager supervisory institutions.

In all the countries analyzed, the contribution rates and tax ceilings are defined in the laws that created the new pension systems. There is a tax ceiling in all the countries, with the exception of Costa Rica and Peru.

In Argentina, Bulgaria, Costa Rica, Poland and Uruguay, the new pension system is mixed, which means that the contributions finance both a private individually funded system and a public system. In Bolivia, Colombia, Chile, El Salvador, Mexico, Peru and the Dominican Republic, the new contributory pension system only has one funding component (although in Mexico the disability and survival insurance is managed by the public system). In Argentina, Bulgaria, Colombia, Costa Rica, Chile, El Salvador, Peru, Poland the Dominican Republic and Uruguay, the former pension system (PAYG) still receives contributions from those who have not changed over to the new system.

In Bolivia, Colombia, Chile, El Salvador, Peru and the Dominican Republic, the disability and survival insurance is managed by the funded system. In Argentina and Uruguay the insurance is managed by both the funded and the public systems. In the case of Argentina, a sole pension is received, but with financing from both systems; in Uruguay a benefit is received from the funded system and another one from the public system. In Bulgaria, Costa Rica, Mexico and Poland the insurance is managed by the public system.

As of June 2006, the total contribution rate to the new pension systems, including the disability and survival insurance, reached a maximum of 32.52% in Poland and a minimum of 9% in the Dominican Republic and Mexico. Considering net values after insurance costs, the rates range from a maximum of 26.48% in Uruguay to a minimum of 6.5% in Mexico.

The contribution rates in the countries whose new pension systems are of a mixed nature, with public management components and PAYG financing, and privately managed systems financed with individual funding, are greater than in the countries with totally private and funded management systems.

The contributions to the private funding component of the new systems, including the disability and survival insurance, range from a maximum of 15% in Uruguay to a minimum of 7.00% in Argentina. Without the insurance, the rates in funded systems range from 13.98% in Uruguay to a minimum of 4% in Bulgaria. In the case of the public component, the contribution rates range from a maximum of 27.5% in the case of Uruguay to a minimum of 2.5% in Mexico (which corresponds to the contribution for covering the disability and survival insurance).

In the former pension systems that are still operating, the contribution rates range from a maximum of 32.52% in Poland to a minimum of 7.50% in Costa Rica.

In Bolivia, Chile and Peru, the entire contribution to the new pension system is charged to the contributor. In Argentina, Bulgaria, Colombia, Costa Rica, El Salvador, Mexico, Poland, the Dominican Republic and Uruguay, the employer pays part of the contribution. With the cost of the disability and survival insurance, the worker’s contribution ranges from a maximum of 16.26% in Poland to a minimum of 1.75% in Mexico. Without the cost of the insurance, the worker’s contribution ranges from a maximum of 13.98% In Uruguay to a minimum of 1.13% in Mexico. Including the insurance cost, the employer’s contribution (in those countries where employers contribute) ranges from a maximum of 16.26% in Poland to a minimum of 6.42% in the Dominican Republic. Without the insurance cost, the employer’s contribution ranges from a maximum of 9.76% in Poland to a minimum of 5.15% in Mexico. In Costa Rica there is a State contribution to the public system of 0.25%. In Mexico, the State contributes 0.13% of salaries to the financing of the disability and survival insurance, and 0.22% of salaries to the funded system.

In practically all the countries analyzed, the total contribution rate to the individually funded private component of the new pension systems is broken down into one part that goes toward the individually funded account, another that corresponds to a management commission and a third part to cover the disability and survival insurance (nevertheless, as we mentioned, in Bulgaria, Costa Rica, Mexico and Poland the insurance is managed by the public system). The percentage destined to the individually funded account ranges from a maximum of 11.95% in Uruguay to a minimum of 3.8% in Bulgaria. The percentage destined to the payment of management commissions ranges from a maximum of 2.03% in Uruguay to a minimum of 0.20% in Bulgaria. Finally, the percentage destined to the payment of the disability and survival insurance premium ranges from a maximum of 13% in Poland to a minimum of 0.91% in Peru.

Table of contents

I. Introduction / 6
II. Methodology / 7
III. Levels and composition of contribution rates / 8

I. Introduction

The study shows the contribution rates and tax ceilings in force as of June, 2006, in the new pension systems that have been established in the FIAP member countries, and the respective tax ceilings and contribution rates in the traditional systems that continue to operate in some of these countries.

It also shows how much the worker, the employer, and when applicable, the State, contribute, and the destination of such contributions, in other words, the percentages that go to the individually funded account, the payment of management fees charged by the pension fund managers and the payment of premiums for disability and survival insurance. In cases where the new pension system includes a public component, the contribution to such systems is also shown.

In all the countries analyzed, the contribution rates and tax ceilings are defined in the laws that created the respective pension systems and consequently, can only be amended by a legislative act.

After this introduction, in Chapter II of the Report, we explain the methodology and the sources of information used. In Chapter III we present the results.

We thank Mrs. Gladys Otarola, Executive Secretary of FIAP and Mrs. Marcela Bardi, the FIAP Study Analyst, for their valuable contribution to the drawing up of this paper.

I.Methodology

The paper is of a descriptive nature. We analyzed information provided directly to FIAP by the trade union associations of the different countries included in the study. Furthermore, we recurred to the Web pages of the supervising agencies of the new pension systems, and, in some cases, we examined the texts of the corresponding regulations.

In some countries, the new pension systems have both private and individually funded components (which we will call “funded” or “private” for greater simplicity) and publicly managed and “PAYG” components (which we will call “public” or PAYG” for greater simplicity). In these cases, which include Argentina, Bulgaria, Costa Rica, Poland and Uruguay, the contributions to the new pension system finance both systems.

In Colombia and the Dominican Republic, the total contribution rate to the new pension system includes a component that finances the provision of solidarity pensions (and in the case of the Dominican Republic, also the supervising agency of the new system).

Moreover, in Bolivia, Chile, Colombia, El Salvador, Mexico, Peru and the Dominican Republic, the new contributory pension system only has one funding component, so that all contributions are destined to the financing of this system (including the disability and survival insurance. In the case of Mexico, this insurance is managed by a public system; however, since there are no contributions for old age pensions in a public system, and the disability and survival pensions are partially financed with the accumulated balance in individual accounts, we have classified the new Mexican system as “only with funded components”).

In Argentina, Bulgaria, Colombia, Costa Rica, Chile, El Salvador, Peru, Poland, the Dominican Republic and Uruguay, the former pension system still receives contributions from those that have not changed to the new system. The amount of such contributions could possibly be different to that required of those who are members of the new system.

The contribution rate to the individually funded systems includes a part that goes to the individual account, together with a part that finances the management commission (it is important to point out that, in many cases, managers are authorized to charge other types of commissions, different to those that are part of the contribution). Furthermore, in the majority of the sample countries, the contribution rates to the new funded systems include the disability and survival insurance premium. However, in Bulgaria, Costa Rica, Mexico and Poland, the insurance is managed by a public system.

The differences in level and structure of the contribution rates between countries can be explained for different reasons. In the first place, four of the five countries whose new pension systems include public and private components (Argentina, Poland, Uruguay and Bulgaria; Costa Rica is the exception) have total contribution rates higher than countries whose new systems only have private funding components. Furthermore, in these cases one could expect the contribution rate to the private component to be less compared to the contribution rate of a system with only one private funding component. This could explain the lower rates in the privately funded systems in Argentina, Costa Rica, Bulgaria and Poland.

Secondly, the regulations of each country reflect different objectives with respect to the level of pensions which are expected to be financed with each component of the pension system. These differences could explain, for example, the low rate in Mexico and the Dominican Republic compared to other countries.

Thirdly, there may also be differences explained by the different management commission structures.

Finally, the differences can be explained by the different coverage and financing structures of the disability and survival insurance.

The differences in the tax ceilings can also be explained by different factors which include both differences with respect to the scope of the social security mandate between countries as well as differences in their respective salary levels.

The contribution rates that are shown in this paper are simple averages of the amounts paid to the fund managers in each country.

III. Level and composition of the contribution rates

Table 1 shows the contribution rates in force as of June, 2006, for financing the new contributory pension systems, including the disability and survival insurance, in the different countries included in this study,. They also show such cases in which the contributions finance other types of systems. For each country it shows whether the new pension system has only one private contributory funding component, or private and public contributory components. The following situations are identified:

  • New pension systems with public and private funding components: Argentina, Bulgaria, Costa Rica, Poland and Uruguay.
  • New pension systems with only a private funding component: Bolivia, Chile, Colombia, El Salvador, Mexico, Peru and the Dominican Republic (in the case of Mexico, the disability and survival insurance is managed by a public system, but such does not receive old age pension contributions).
  • Countries in which the former public system continues to operate (for those who choose it or were assigned to it): Argentina, Chile, Costa Rica, Colombia, El Salvador, Peru, Poland, the Dominican Republic, Uruguay and Bulgaria (in Bulgaria, Chile, El Salvador, Poland, the Dominican Republic and Uruguay, entry to the public system is closed: in Argentina, Costa Rica, Colombia and Peru entry to the system is still open).

In the new pension systems, the contribution rates as a percentage of taxable income, including the disability and survival insurance premium, range from a minimum of 9% applied in Mexico and the Dominican Republic, to 32.52% in Uruguay. As a net value of the latter cost, the rates range from a minimum of 6.5% in Mexico to a maximum of 26.48% in Uruguay.

The contributions to the private, funded components of the new systems, including the disability and survival insurance, range from a minimum of 9% applied in Mexico and the Dominican Republic, to 32.52% in Poland. Net without the latter cost, the rates range between a minimum of 6.5% in Mexico, to a maximum of 26.48% in Uruguay.

The contributions to the private, funded component of the new systems, including the disability and survival insurance, range from a maximum of 15.0% in Uruguay to a minimum of 7.0% in Argentina. Without the insurance, the rates of the funded systems range from a maximum of 13.98% in Uruguay to a minimum of 4% in Bulgaria. In the case of the public component, the contribution rates range from a maximum of 27.5%, in the case of Uruguay, to a minimum of 2.5% in Mexico (which, as we mentioned, corresponds to the contribution for covering the disability and survival pension).

The countries whose pension systems include public and private contributory components, (Argentina, Bulgaria, Costa Rica, Uruguay, and Poland), have higher contribution rates than countries with entirely individually-funded systems, (Bolivia, Chile, Colombia, El Salvador, Mexico, the Dominican Republic and Peru). In the first group of countries, the contribution rates to the funded system, including the disability and survival insurance, range from a maximum of 15% in Uruguay to a minimum of 7% in Argentina. Without the insurance, the rates range from a maximum of 13.98% in Uruguay to minimum of 4% in Bulgaria. In the same countries, the contribution rates to the public system range from a maximum of 27.5% in Uruguay to a minimum of 7.5% in Costa Rica. If we look at the countries in which the disability pension is included in the public system, and considering such, we find that the highest rate varies and that it is Poland that has the highest rate at 20.3%.

In the group of countries whose pension systems only have a private contributory funding component, the contribution rates, including the disability and survival pension, range from a minimum of 9% in the Dominican Republic (with 0.4% to the Solidarity Fund and 0.1% for the financing of the Superintendency) and Mexico, to a maximum of 15.5% in Colombia (including 1.5% that is destined to the financing of a solidarity system). Without the insurance, the rates range from a minimum of 6.5% in Mexico to a maximum of 14.05% in Colombia.

The country with the highest tax ceiling is El Salvador with US$ 5,275/month, whereas the country with the lowest tax ceiling is Bulgaria with US$ 909/month. In Peru there is no tax ceiling (it only applies a ceiling of US$ 1,971.78/month for that part of the contribution that is destined to the disability and survival insurance premium). In Costa Rica there is no tax ceiling. In the case of the Dominican Republic, the ceiling is 20 minimum wages, but there are different minimum wage levels depending on the economic activity of the contributor. Consequently, there is no sole absolute-value ceiling. In Colombia an additional percentage is applied to contributors that have salaries greater than 16 legal minimum wages per month (the respective Table is presented in the Notes of Table No. 1).

In Table No. 2 the contribution rates applied in the former system are shown, in the case of those countries that still maintain those systems.

In the former pension systems that are still open, the contribution rates range from a maximum of 32.5% in Poland to a minimum of 7.50% in Costa Rica.

Among the countries that have closed access to the former PAYG system, Poland has the highest contribution rate at 32.52%[3]. The former system in the Dominican Republic, in turn, has the lowest contribution rate at 9%.

Among the countries that maintain open access to the former PAYG system, Argentina has the highest contribution rate at 27% (and a tax ceiling of US$1,555), made up of contributions by the worker (11%) and the employer (16%). Costa Rica, in turn, has the lowest rate at 7.5%, (and no tax ceiling), made up of contributions by the worker (2.5%), the employer (4.75%) and the State (0.25%).

1

Table No. 1

Contribution Rates - New Pension Systems*

(% Taxable income. Simple averages as of June, 2006)

Country / Type of system / Contribution rate new system / Tax ceiling (US$)
Total (% taxable income) / Funded system / Public system / Other items
% contribution individual account and commissions / Disability and survival insurance / Total funded system / % Contribution / Disability and survival insurance / Total public system / %
Latin America
Argentina (7) / AFP + Public syst. / 23.00% / 5.63% / 1..37% / 7.00% / 16% (13) / (14) / 16.00% / - / US$ 1,555 (3)
Bolivia / AFP / 12.21% / 10.50% / 1.71% (5) / 12.21% / - / - / - / - / US$ 3,750
Colombia (7) / AFP / 15.50% / 12.55% / 1.45% / 14.00% / - / - / - / 1..5% (9) / 25 Minimum wages (8)
Costa Rica (7) / AFP + Public syst. / 11.75% / 4.25% / - / 4.25% / 7..5% (15) / (16) / 7..5% / - / No ceiling
Chile (7) / AFP / 12.42% / 11.36% / 1.06% / 12.42% / - / - / - / - / US$ 1,990
El Salvador (7) / AFP / 13.00% / 11.70% / 1.30% / 13.00% / - / - / - / - / US$ 5,275
Mexico / AFP / 9.00% / 6..50% / - / 6..50% / - / 2..5% (17) / 2.5% / - / US$ 3,337
Peru (7) / AFP / 12.74% / 11.83% / 0..91% (4) / 12.74% / - / - / - / - / (2)
Dominican Rep. (7) / AFP / 9.00% / 7..50% / 1.00% / 8.50% / - / - / - / 0..5% (10) / 20 Minimum wages (11)
Uruguay (7) / AFP + Public syst. / 27.5% (11) / 13.98% (6) / 1.02% / 15.00% / 27.5% (18) / (19) / 27.50% / - / US$ 1,711
Europe and Asia
Bulgaria (7) / AFP + Public syst. / 23.00% / 4.00% (12) / - / 4.00% / 19.00% (20) / (21) / 19.00% / . / US$ 909
Poland (7) / AFP + Public syst. / 32.52% / 7..30% / - / 7.30% / 12.22% / 13.00% (22) / 25.22% / - / US$ 1,933

* Member countries of the International Federation of Pension Fund Managers from whom information was obtained.