Volume 44, Number 173,
April-June 2013
Automatic Stabilization and Social Security:
Brazil, Mexico, Costa Rica and Chile
Eloy Fisher

The classic criteria to define an automatic stabilization program were provided by Egle (1952:1): 1) permanently installed, 2) well-described provisions and objectives and 3) linked to cyclical criteria with a high degree of certainty. The last factor implies that the program begin its counter-cyclical operations to the extent that the need for action is present. As such, automatic stabilizers produce deficits during economic collapse and surpluses in times of growth, without the need to make policy decisions. In this way, these programs increase the inventory of current assets during recessions and reduce it in times of prosperity, acting like an anti-cyclical break on the public demand for liquidity (Hart, 1954).

Although automatic stabilization is an old Keynesian idea, as Olivier Blanchard mentioned with melancholy (2000), between the 1970s and the 1990s, economic thought adopted monetarism and the theory of real economic cycles and their aggressive anti-inflationary provisions. As the classical vision of an economy upsetting equilibrium returned, stabilization policies fell into disuse, both in discretionary and automatic forms. Against this backdrop, Blanchard recognized in an interview in 2006 that, “very little research has been done regarding automatic stabilization [...] over the past twenty years.”

This trend was reversed when the global economy entered into recession in 2008. Some countries, due to institutional singularities, were able to protect themselves from the most adverse effects of the economic contraction through social programs that increased family purchasing, despite the fact that unemployment was on the rise, income was dropping and other sources of assets in circulation dried up. It was not long before some economists recognized that “social transfer programs, especially the generous unemployment insurance programs in Europe, played a key role in stabilizing available income and largely explained the reaction of automatic stabilizers in Europe and the United States” (Dolls, Fuest and Peichl, 2010).

Although resurrecting the debate surrounding automatic stabilization programs has tended to focus more on recognized sources, such as unemployment insurance, there are also other paths available. As will be highlighted later in this text, the recession reignited interest in traditional and non-traditional methods of automatic stabilization, with findings that were clearly suggestive of the anti-cyclical nature of a wide variety of social programs addressing health, pensions, disability and illness.

The Great Recession of 2008 was not an entirely unpleasant shock to Latin America, given their accumulation of reserves and a favorable international price market for primary export goods. For this reason, social spending was more efficiently directed and maintained. The reforms of the 1980s remained in the past, when the region had began ambitious government-led restructuring plans to recalibrate prices and reignite growth prospects following the debt crisis. The focal point of many of these reforms were the social security systems, which suffered from structural deficits because the funds were used to defray the costs of public spending and external imbalances. In the framework of monetarism, where it was necessary to restrict excess assets in circulation in order to influence asset prices to “real” denominations, operations were decentralized from social security systems and the macroeconomic impact was minimized.

We can understand these social security plans through two levels of management and three grand financial schemes. According to Mesa Lago (2000), the first level is whether the system is public or private. Public plans do not have a defined contribution, as this will depend on variable factors such as the demographic dynamics of the population, the actuary maturity of the program, and more. Benefits are defined, as the exact formulas for calculating pensions are regulated by law. By contrast, private plans have a defined contribution that depends on the savings capacity of the agent, and the final benefits depend on the amounts accumulated and the yield of investments associated with the retirement account when the agent requests the benefits.

On the second level, these programs assume three configurations: public programs generally take on the form of a financial regime of distribution, where there is no actuary reserve to pay future benefits and as such, expenditures are directly financed by contributions. Secondly, there are partial collective capitalization systems, where a partial reserve is accumulated to defray the costs of expenditures for a limited time period. Finally, the actuary structure of private plans is full and individual capitalization, where the benefit is from savings taken from accumulated contributions and the yields associated with an individual account.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 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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