Costa Rican Pension System Options for Reform

The Costa Rican Social Insurance Fund - the country's main social security institution - was established in 1941 to provide compulsory social insurance coverage for employees, through old-age, disability, and survivor pensions, as well as sickness and maternity benefits. The current status of the pension system is alarming, and reform is urgently needed. Among other things: 1) the system is costly to the government; 2) it promises generous benefits that are difficult to sustain; 3) contribution rates are low; 4) the link between contributions and benefits is weak; 5) inflation indexing is inadequate and ad hoc; 6) although there is no explicit early retirement system, individuals have found a substitute for early retirement in disability pensions; 7) health benefits to pensioners are paid out of pension contributions; and 8) the system's reserves have not been well invested. Reform of the system should be immediate. At a minimum, reform should include: reduced benefits; higher contribution rates; a higher retirement age; a stronger link between contributions and benefits; and the unbundling of health and pension accounts.