Savings as a Complement to the Retirement System

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A report published by the Inter-American Development Bank (IDB) shows that Latin America is aging faster than other continents. By 2050, one in five people will be older than 65. Not only will more people be retired, they will also live longer.

If we add to this equation that the birth rate is falling, it results in a population with the highest aging rate of the planet. Today there is an average of nine workers to support a retiree, in 2050 there will only be three workers to support him or her.

One of the possible solutions is to increase the size of the economy, and one of the ways to make a sustained effort to increase the presence of women in the labour market. According to a study by McKinsey, closing the gender gap in Latin America would generate by 2025 an additional GDP of 2.6 trillion. Greater economic activity generates greater contribution capacity to the social security system, which improves the equation for the retirement system. Women have a higher life expectancy than men, spending an average of 5 more years in this system. Financial education, especially in low-income sectors, is one of the most important challenges that governments should have in relation to the issue of female inclusion and its contribution to the economy of a country.

At the private level, saving is another way out of this dangerous equation, it accounts for between 70% and 90% of the countries in the world, being Latin America a region with a very low rate compared to other countries, less than 20 % compared to 35% in high growth regions. Only 16% of savers do it through the financial system, compared to 50% in advanced countries.

Reality shows that the lack of instruments, the exchange instability and the change of rules in the economy are not an excuse to make a cultural change of scale. Educating our children, at an early age, in the culture of saving will give them more weapons to deal with a difficult system to maintain in the long run and turn them into architects of their own destiny without necessarily having to depend on the unsustainable retirement system in the long term.

On the other hand, the evidence in the world shows that historically, an increase in savings rates is directly related to economic growth, provided that the increase is accompanied by increases in productivity (in other words, investment). Not only should you save, but you should also take advantage of those savings. This return generates a ‘positive cycle' since a higher return results in a greater incentive to continue saving, which generates greater productivity. This higher productivity also leads to higher growth and an economy with greater capacity to sustain, in the last instance, an increasingly large segment of retirees in our region, as well as obviously a private support for the retirement of each one of us.

December 14, 2018

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