_Page 3_ _PENSIONREFORMiNLATINAMERiCa_ While not every country has the same degree of problems with regard to contributions, benefits and coverage, the preponderance of these concerns suggests that these problems are inherent in pay-asyou-go, defined benefit plans.

# B. ESSENTIAL **DATA FOR** ASSESSING **THE** HEALTH OF PENSION SYSTEMS

In most countries worldwide, pension reform typically occurs in the context of a fiscal crisis or impending fiscal crisis affecting the solvency of the pension system. This occurs in part because of the political resistance to changing current pension systems. At the same time, surpluses in a largely unfunded system may not be an indicator of financial health. A second reason pension reform often comes too late is the absence of good data on the fiscal implications of the _status quo_ as well as of policy options to reform the system. This problem is especially critical in developing countries. Basic and reliable information on the number of contributors and pensioners is essential to forecast future revenues and payouts but is not always readily part of the data that is brought to policy makers' attention. Appropriate models are needed to estimate future fiscal implications.

## Demographic and Economic Data

Detailed demographic information is basic and essential. Data on present population, mortality rates, fertility rates and immigration are among some of the factors required to understand the size and pace of the aging population in relation to younger cohorts. The age structure of the population is important to understand dependency ratios. Dependency ratios are defined as the number of younger people to support the population of older persons who are retired.

Labor market conditions are another factor whose trends are important to guide pension policy. The number of employed individuals determines the portion of the younger population that is contributing (in pay-as-you-go systems) toward retirement payments to older individuals. Contractions in ernployment will affect contributions. So, too, will the definitions in the pension plans as to those who are covered. Military and civil servants are among some groups that may be exempted and have their own pension plans. The retirement age affects the length of time that a worker will be making contributions. This information helps to determine the effective contribution group which is contributing money into the pension system.

The financial sustainability of a pension system depends not only on the number of contributors and pensioners, but also econonic trends. Macroeconomic indicators such as GDP growth, inflation, real interest rates and wage growth all affect the financial status of pension funds. The distribution of the working age population according to wage rates is important to capture differentiation in these variables.

Diagnostic data are needed to assess the causes, timing, and degree of seriousness of problems associated with present pension systems. Some fundamental questions need answers in order for a diagnosis of overall health to be made. For example, the system's dependency ratio may be too high because the retirement age is too low. There may be a significant amount of evasion that would reduce revenue. The number of groups exempted from coverage may be too high which would affect equity. The health of a pension system would be affected by low rates of return to pension assets compared with the average cost of capital in financial markets. The return on workers' investments in a pay-as-you-go system as compared to a fully funded system has a significant impact on retirement income. These questions help to diagnose the source of financial imbalance which allows for appropriate remedial action to be taken.