THE PROBLEM OF THE SOCIAL SECURITY IN ECUADOR

Functioning of the IESS

Among the numerous problems that suffer this country one of the most critical problems that the government must handle every year is the social security.

What is the cause of this problem?

In Ecuador every single worker must be registered in the Instituto Ecuatoriano de Seguridad Social or IESS. This institution is the responsible of all the social security in Ecuador. The main problem that affects the good performance of the IESS is the system of handling of the resources that the institution obtains from their insured citizens.

How does the system works?

First of all since every single worker in the country must be registered in the IESS they are obligated to make a contribution to the institution this contribution is in average about a 20.50% of the workers salary. This contribution goes to a unique account, in this account the entire contributions make a single found regardless of the amount or the person that made it.

Then the administration of the IESS takes the money of the account and uses it to pay all the expenses and benefits that the institution offered to their insured.

Benefits, such as the general security system, the Peasant Security System, medical support, old age pensioners, widowhood and orphanage.

This kind of system is called a pyramidal system, because the founds to pay the benefits of the first group of people that entered in the system come from new groups of people that entered in the system, as the time has passed, although this new group will depend of future and bigger groups that maintain the pyramid.

At the beginning the system was very lucrative, everybody contributes and nobody receives pensions or benefits. But when the time passed, the institution had to pay the offered benefits.

Two things made this system unable to function:

The first one is related to the fact that how the benefits of the eldest group depend of new groups the system always need bigger groups to maintain the pyramid, but a very important factor made the pyramid deformed. The increase of the life expectation in Ecuador and world- wide makes that the institution must maintain retired people by much more years than in the beginning of the pyramid.

The INCAE, made a study about it, explained in the next chart:

Chart #1 Life expectation in Ecuador (In years of life)

Years 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: INCAE Elaboration: The Author

Population 48.38 51.42 54.75 56.79 58.91 61.46 64.56 67.11 68.90 69.91 70.88 71.83

% Increase 6.27 6.48 3.74 3.73 4.32 5.05 3.94 2.67 1.47 1.39 1.33

The chart shows that in 1950 the population in Ecuador use to live in average between 48 and 49 years old so the institution must support retired people for only a few years. But in the new millennium the population from Ecuador is leaving about 71 and 72 years old. It means that nowadays the institution must support and bring benefits to retired people for 23 years more than in the beginning of the system.

The second thing that contributed with the problem is the regulation that rules the inversions that the IESS realized.

What do this means?

When the institution obtains surplus in their activities this surplus is invested in the bursarial market. This inversion generates a profit but the regulations created by former governments obligate to maintain the inversions and its profit being re inverted in successive way and so far, converting the money of the IESS in a financial roulette avoiding that the institution could receive the benefits of his own inversions

Chiles Security System

Decades ago in Chile, the Social Security in that country, that use to used the same System that is used here in Ecuador, were about to collapse, but in 1980 the minister of government Jose Piera elaborates a new revolutionary system that eliminate the old pyramidal system and change the Social Security in that country for ever. This new system is called The Individual Capitalization Model. This new model is very simple, first of all eliminates the unique account that the old system uses, and creates Individual Accounts for every single worker that enters in the model, this Individual Accounts are handled by new Independent Companies called

Administradoras de Fondos de Pensiones or AFP. These AFPs are the responsible to manage and invest the money of the Individual Accounts. When a worker gets retired, the AFP takes the money of his Individual Account and returned to him in the way that the worker consider best for his interests. This could be the entire amount in one single payment, or monthly payments during his life.