Volume 44, Number 173,
April-June 2013
Automatic Stabilization and Social Security:
Brazil, Mexico, Costa Rica and Chile
Eloy Fisher*
Date received: June 27, 2012. Date accepted: December 6, 2012

This article presents an empirical model to estimate to what extent social security systems have served as an automatic stabilizer in select Latin American countries (Brazil, Mexico, Costa Rica and Chile), to measure the impact of social security as a counter-cyclical lever at the public policy level. Our estimate finds certain counter-cyclical features on the side of contributions, although expenditures for benefits did not reveal significant effects. On the net level, significant inflationary effects cancel each other out. Undoubtedly, maintaining a prudent macroeconomic approach is also a guarantee of welfare for growing numbers of pensioners. As such, it is imperative to strengthen these programs as part of a series of public policies that not only serve to eliminate poverty among vulnerable groups, but also to ensure important and unrecognized macroeconomic features.

Keywords: the macroeconomics of social security, automatic stabilization, social security systems in Brazil, Mexico, Costa Rica and Chile.

The purpose of this work is to determine if social security has provided some traction to the economic cycle of certain Latin American countries, in spite of existing nominal distortions. This research thus fits into a more general framework, raising the following question: Do social security programs around the world produce macroeconomic consequences that may not be visible at first glance?

Using works by Darby and Melitz (2008) and Ghilarducci, Saad-Lessler and Fisher (2012) as a starting point, which estimate the cyclical impact of social security programs in Europe and the differential impact of public and private pension programs in the United States, respectively, this text argues that social security programs in Latin America do provide macroeconomic traction. On the general level, this even provides an escape from the inflationary distortions of the last twenty years. Contrary to the results of the two studies cited above, where the findings indicate that social security programs produce important counter-cyclical effects for taxes and expenditures in countries where inflation is not a key variable (with pro-cyclical effects regarding private systems in the us), taxes have significant counter-cyclical effects among programs in our sample, while benefits expenditures are acyclical, a remarkable result. Although saying that this is a causal relationship remains open to future research, it would not be going too far to state that despite elevated inflation rates and the deep public austerity policies undertaken by many countries in the region to eradicate this, the above demonstrates that social security in our nations is still a reliable income source for the majority of the population.

However, inflation should not be the only reason to re-evaluate the relevance of these programs for emerging economies. In a responsible macroeconomic framework, social security programs are a viable system in the sense that they provide a suitable response to the signs of the economic cycle. Regarding social security programs all around the world, as explained by Ghilarducci, Saad-Lessler and Fisher (2012), the impact of a recession leads to reduced income and lower chances of finding employment. Thus, workers that have the opportunity to retire will do so if they recognize that their balances will provide a guaranteed income flow. Still, if accumulation is dependent upon the economic context, this guarantee no longer exists. Likewise, given that social security benefits represent a larger proportion of income for homes with greater liquidity restrictions, spending these benefits could contribute to stabilizing aggregate demand when needed in times of recession.

In more heterogeneous labor markets, like those of Latin America, these effects are more difficult to visualize, especially when inflation undermines the impact of the spending of family funds in the form of social security benefits. Even so, it is relevant to visualize the more general effects on aggregate demand, and situate them as part of a set of tools to mitigate the adverse consequences of macroeconomic bubbles and the unemployment and poverty that result. To the extent that these programs not only provide a decent retirement to millions of workers but also alleviate the pro-cyclical pressures of international uncertainty, we can re-imagine their role as an indispensable element of the framework of a State with more efficient and effective macroeconomic performance.

1 The author is grateful to the Summer School of the Economic Commission for Latin America and the Caribbean (ECLAC) and in particular to Jürgen Weller and Esteban Pérez-Caldentey for their careful commentary on previous editions of this paper. Likewise, the author is grateful to Teresa Ghilarducci of the New School for providing orientation on this topic. Any errors or omission, however, are the entirely author’s own.

*Doctoral candidate in Economics, The New School for Social Research and Research Associate at the Council on Hemispheric Affairs (COHA), U.S.A. E-mail: eloy.fisherulbrightmail.org

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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