Uruguay: Selected Issues

Uruguay: Selected Issues


Uruguay: Selected Issues

The Challenges of Population Aging for Pensions in Uruguay1

This paper investigates the long term fiscal gaps from higher pension spending as Uruguay’s population is aging. It quantifies the expected increase in public pension spending for the defined-benefit and solidarity pillars of Uruguay’s mixed system, and projects theoretical replacement rates considering both defined-benefit and defined-contribution pensions.

A. Motivation

1. Uruguay’s population is rapidly aging. Uruguay has one the highest proportions of elderly citizens in Latin America. Fourteen percent of the population is currently over 64 and this share is expected to increase to about 22 percent by 2050 and 31 percent by 2100, as fertility continues to decline and life expectancy increases. The median age is projected to rise from 35 currently to 42 in 2050 and 49 in 2100. According to UN projections, Uruguay’s population would start declining as soon as in 2055.

Figure 1.
Figure 1.

Uruguay: Age-Distribution of the Population

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Source: UN, World Population Prospects.

2. These demographic changes will directly affect long term fiscal sustainability by putting pressure on the pension system. The old-age dependency ratio, defined as the population aged 60 and above over the working-age population, is expected to grow from less than 33 percent in 2015 to 50 percent in 2050, and close to 77 percent in 2100. This increase will put pressure on the financial equilibrium of the pension system whose financing mostly relies on contributions or taxes paid by workers, while expenditures benefit elderly people.

B. Uruguay’s Pension System

3. The Uruguayan pension system has evolved from a “pure” pay-as-you-go system to a mixed system. The Uruguayan pension system is one of the oldest in Latin America. The very first pension system, for veterans of the independence war and widows, was created in 1829. The early, fragmented, pension systems were progressively unified and extended to cover all public and private sector employees. Since 1989, the Constitution provides that pension benefits shall be indexed to the median wage. In 1996, the system was reorganized into a mixed system including a pay-as-you-go (PAYG), defined-benefit component and an individually-funded, defined-contribution component (Law 16.713). The PAYG pillar is administered by the Banco de Previsión Social (BPS) for most contributors. In addition, there exist five separate systems for banking sector employees, university professionals, public notaries, the military and the police. The second pillar is managed by private pension fund administrators (AFAPs) under the supervision of the central bank. Above a certain income threshold, workers can voluntary contribute additional savings. The system also includes a noncontributory elderly and disability pension program.

4. Workers’ contributions only partially finance the system. The first pillar of the system (PAYG) is funded by a combination of employers and workers’ contributions, earmarked taxes, and transfers from the government to cover recurring funding gaps. Uruguay’s active coverage (measured by the ratio of contributors to the economically active population) at 77 percent, is very high among Latin American countries and has been rising over the past ten years as informal employment has declined.

5. Contributions are split between the defined-benefit and defined-contribution pillars. Under the general contribution scheme, employers’ contributions (7.5 percent of wages) exclusively finance the PAYG pillar. There exist four alternative contribution schemes for the construction sector, rural enterprises, household employees, and “subsidized services” (workers exposed to radiations, asbestos workers, pilots, etc.). Workers’ contributions (15 percent of wages) are split between the PAYG and the defined-contribution system, with shares that depend on the wage level. There are four salary brackets.

  • For monthly wages under 5,000 pesos in 1995 (39,871 pesos in 2015—bracket 1), 100 percent of the workers’ contribution goes by default to the BPS, but article 8 of Law 16.713 allows workers to voluntary choose to direct 50 percent of this contribution to the individually funded system (AFAPs). Workers choosing to do so get a subsidy equivalent to 50 percent of their contributions to the BPS (i.e. the base for the computation of their pension from the PAYG pillar is increased by 50 percent).2

  • For wages between 5,000 and 7,500 pesos in 1995 (39,871 and 59,806 pesos, respectively, in 2015—bracket 2), workers contribute to the BPS for the first 5,000 pesos, and to the individually funded system for the remainder. Alternatively, they can also increase their contributions to the individually funded system by directing 50 percent of their contribution on the first 5,000 pesos of wages to the AFAPs and the remainder to the BPS.

  • For wages above 7,500 pesos (59,806 pesos in 2015—brackets 3 and 4), contributions are made to the BPS for the first 5,000 pesos, and to the individually funded system for the remainder.

  • No pension contributions are required for the portion of compensation exceeding 15,000 pesos (119,612 pesos in 2015 – bracket 4), but workers can voluntary contribute to the AFAPs.

Law 19.162, passed in 2014, allowed certain BPS affiliates in the first and second bracket to revoke their participation in the individually funded system, in which case the AFAPs have to transfer the accumulated contributions to the BPS. The special regimes for banking sector employees, university professionals, public notaries, the military and the police have their own funding rules.

6. Benefits include contributory benefits and non-contributory solidarity pensions. Pension benefits are paid by the BPS for the PAYG pillar, by the insurance company (Banco de Seguros del Estado) for the defined contribution pillar (out of the accumulated individual saving transferred by the AFAPs), and by the respective special funds for the five special regimes:

  • The common retirement pension is paid to workers aged 60 or above, cumulating at least 30 years of contributions. For the PAYG pillar, the replacement rate is equal to 45 percent plus one percent for each year worked above 30 years of employment up to 35 years, 0.5 percent for each year after 35 years with a maximum of 2.5 percent, and 3 percent for each year of work after 60 years old and 35 years of employment with a maximum of 30 percent, or 2 percent for each year of work after 60 until age 70 or until reaching 35 years of work whichever comes first. The base for the calculation is the average wage over the last 10 years of employment or the average wage over the best 20 years of earnings if higher, with a maximum equal to the average of the best 20 years plus 5 percent (“basic pensionable salary” or sueldo basico jubilatorio). Under the mixed system, the monthly pension paid by the BPS is capped at a maximum of 36,143 pesos in 2016.

  • The old-age pension can be paid to workers (who do not qualify for the common retirement pension) aged 65 and above, with 25 years of contributions. Its amount under the PAYG pillar is equal to 50 percent of the basic pensionable salary plus one percent for each year of employment exceeding the required minimum number of years of service (25 years at age 65, 23 years at age 66, 21 years at age 67, 19 years at age 68, 17 years at age 69, and 15 years at age 70), with a maximum of 14 percent.

  • Complete-disability and temporary disability pensions are equal to 65 percent of the basic pensionable salary.

  • Individuals above 65 and disabled individuals whose resources fall below some minimum are entitled to receiving a non-contributory pension (the solidarity pillar). The minimum pension guaranteed by the non-contributory system amounts to 8,452 pesos in January 2016.

  • There are no guaranteed benefits for the individually funded pillar.

7. Passive coverage is very high, in absolute terms and also relative to other countries in the region. The proportion of people aged 65 and above who receive a pension exceeds 90 percent (BPS only) which places Uruguay in the top two countries in the region for passive coverage. About 7 percent of the population above 65 is covered by the noncontributory system (pillar 0).

C. Long-Term Fiscal Sustainability

8. Public pension expenditures as a share of GDP are higher in Uruguay than in other emerging and Latin American countries in 2015. Expenditures for the solidarity pillar and PAYG pillar represented respectively around 0.5 and 7.4 percent of GDP in 2015, while expenditures for the five special regimes together are estimated around 3.1 percent of GDP. In comparison, average public pension spending was equal to 3.6 percent of GDP in the Latin American region and 4.5 percent in all emerging economies.3 The higher old-age dependency ratio and passive coverage can explain this difference.

9. Pension expenditures for the solidarity and PAYG pillars as a share of GDP are projected to increase by about 30 percent by 2065. Public pension expenditures for the two solidarity and contributory pillars administered by BPS are projected to slightly decline until 2030 along with the cost of the transition system, before increasing again through 2100.4 According to those projections, pension expenditures could reach 10.3 percent in 2065 and 12.9 percent of GDP in 2100. Similarly, the fiscal gap stemming from the difference between projected expenditures and revenues is projected to slightly decrease, remaining around 0.7 percent of GDP by 2030, before resuming a steady ascent and climbing up to 6.2 percent by 2100.

10. Public pension spending in Uruguay as a share of GDP would exceed that of advanced economies by 2065. The present discounted value of public pension spending increases over the period 2015–65 amounts to 12 percent of 2015 GDP, below the levels estimated for other emerging and advanced economies. This value however increases to 80 percent until 2100.5 It does not include pension spending by special regimes, for the police and armed forces in particular.

D. Adequacy of Pensions

11. There can be a trade-off between fiscal sustainability and adequacy. The 1996 reform introducing an individually funded component accounts for the limited spending increase projected in the next 50 years. However, this may come at the cost of lower pension benefits, if for instance, contributions to the defined-contribution pillar are insufficient or rates of return too low.

12. To assess the risk of inadequate pensions, we project theoretical replacement rates until 2100. The projection is done separately for men and women since life expectancy varies by gender. Individuals are assumed to start working at age 20 and to retire at age 60. The baseline projection conservatively assumes a contribution density of 75 percent, that is working-age individuals are assumed to contribute three years out of four to the pension system (and to be unemployed, outside the labor force or to work outside the formal sector during the fourth year). The model assumes that workers have perfect foresight and optimally choose whether to contribute or not to the defined-contribution pillar when they have the choice (wage-earners in brackets 1 and 2 in Figure 2). The projection is done in five steps:

  • The average wage life-cycle profile is projected for each year of the projection period (2015–2100). For simplicity, a flat profile is assumed. Future real wage growth is set equal to 2 percent per year.

  • Based on the wage profile and contribution rate, pension contributions by age are computed for each year.

  • The value of individual retirement accounts at the legal retirement age is computed by cumulating pension contributions over time, assuming a 3.5 percent real rate of return.

    The value of the pension received at retirement is computed by applying the replacement rates guaranteed by the PAYG pillar to the contributing wage (possibly increased by the subsidy for wage-earners in bracket 1 having chosen to contribute to the defined-contribution pillar) and using a standard annuity formula for the pension paid by the defined-contribution pillar.6

  • Theoretical replacements rates are computed by relating the total pension received at the legal retirement age to the last wage before retirement.

Figure 2
Figure 2

Uruguay: Distribution of Workers’ Pension Contribution, by Income Bracket

(2014 values, in peso)

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Source: BPS based on a graph by Republica AFAP.
Figure 3
Figure 3

Uruguay: Active and Passive Pension Coverage

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Sources: BPS, IDB, INE, and staff calculations.
Figure 4
Figure 4

Uruguay: Public Pension Spending Projections

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Sources: BPS and IMF staff calculations.

13. The projected theoretical replacement rates for the average wage-earner with a 75 percent contribution density stem solely from the PAYG pillar. The reason is that these workers would prefer not to voluntary contribute to the defined-contribution pillar. The average wage in Uruguay (estimated at 23,141 pesos in 2014) falls in the lowest income bracket for the determination of the contribution to the defined-contribution pillar (Figure 2). The calculations, based on the above assumptions, suggest the average-wage earner would be better off solely contributing to the PAYG pillar, offering a replacement rate of 47 percent in 2030. However, average wage-earners with a full career (contribution density of 100 percent) would theoretically get higher replacement rates, of 56 percent in 2030 and 55 percent in 2065, by contributing to the defined-contribution pillar and taking advantage of the public subsidy on their contributions to the PAYG pillar.

Figure 5.
Figure 5.

Uruguay: Theoretical Replacement Rates by Source, by Contribution Density

(Percent of Last Wage)

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Source: IMF staff estimation.

14. Replacements rates in 2065 and 2100 would exceed those in other countries in the region with defined-contribution or mixed systems. Projected theoretical replacement rates for 2030 are lower than the current average replacement rate in OECD countries, excluding Chile and Mexico, and the average replacement rate projected in other Latin American countries with defined-contribution or mixed systems.7 However, the latter is projected to decline over time, as in these countries the contribution of defined-benefit systems and solidarity pillars to projected replacement rates declines over time.

Figure 6.
Figure 6.

Uruguay: Pension Replacement Rates, International Comparisons

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Source: OECD, IMF staff calculations.

E. Policy Discussion

15. Future reforms will need to address the growing fiscal expenditures required to maintain constant replacement rates. The above projected theoretical replacement rates for Uruguay are well below past replacement rates, that prevailed in the old single PAYG system. In 2010, the OECD estimated the median net replacement rate at 66.3 percent. For contributors to the defined-contribution pillar, the adequacy of future pension benefits will increasingly depend on the rate of return on individual pension savings accounts (sensitivity analysis not presented).

16. However, overall contribution rates are high compared to other countries in the region and do not leave much scope for an increase. The total contribution rate, combining both workers and employers’ contribution, reaches 22.5 percent in Uruguay against 13.6 percent on average in other Latin American countries (Table 2).

Table 1.

Uruguay: Structure of the Pension System

article image
Table 2.

Uruguay: Pension Systems in Latin America

article image
Notes: Values in brackets report indicators for women when different.

Percent of gross payroll.

Source: USA SSA 2015; OECD; IDB; and World Bank.

17. Increasing the retirement age to 65 could be an option to improve both fiscal sustainability and adequacy. The legal retirement age is still relatively low in Uruguay and typically well below that of advanced economies facing similar aging challenges. Simulations suggest that a gradual increase in the retirement age to 65, along with the corresponding change in the computation of benefits, would prevent pension spending from the PAYG pillar from increasing above their current level at least until 2065. An increase in the retirement age would also lead to an increase in the individual savings accounts, since workers would contribute for more years, as well as in the annuity paid to retirees as it would in addition partly compensate the increase in life expectancy at retirement. Theoretical replacement rates would therefore also increase.

Figure 7.
Figure 7.

Uruguay: Simulated Effect of Reforms

Citation: IMF Staff Country Reports 2017, 029; 10.5089/9781475573626.002.A005

Note: Possible reforms include an increase of the legal retirement age to 65, a reduction of pension benefits by 10 percent, and an indexation of benefits on inflation.Source: IMF staff calculations.

18. A similar improvement in fiscal sustainability could be obtained through a change in the benefit indexation formula, from indexation to the median wage to indexation to inflation. Indexing pension benefits on inflation would also reduce the risks borne by insurance companies (currently solely the Banco de Seguros del Estado) which pay out pension annuities for the defined-contribution pillar out of accumulated savings whose nominal rate of return depends on price inflation. Such a change would, however, require a constitutional reform and would not help raise replacement rates.

19. Addressing the deficits of some of the special regimes is also crucial for fiscal sustainability. The estimations presented in this paper did not take special regimes into account. Some of those regimes are currently running sizable deficits (e.g. military pension regime) which, if left unaddressed, would significantly add to projected fiscal challenges.


  • BPS 2015, “Proyección financiera del sistema provisional contributivo administrado por el Banco de Previsión Social, Periodo 2020-2065, Análisis Global,Asesoría General en Seguridad Social, Comentarios de Seguridad Social, 48, 2do. Trimestre 2015.

    • Search Google Scholar
    • Export Citation
  • BPS, 2015, “Proyección financiera del sistema provisional no contributivo administrado por el Banco de Previsión Social, Análisis de la evolución del monto de pensiones no contributivas,Asesoría General en Seguridad Social, Comentarios de Seguridad Social, 50, 4to. Trimestre 2015.

    • Search Google Scholar
    • Export Citation
  • IDB, 2016, “Saving for the Future: Pension Systems.” In Cavalla, E. and T. Serebrisky (eds.), Saving for Development: How Latin America and the Carribbean Can save More and Better. Palgrave Macmillan U.S., 2016.

    • Search Google Scholar
    • Export Citation
  • Clements, Benedict, David Coady, Frank Eich, Sanjeev Gupta, Alvar Kangur, Baoping Shang, and Mauricio Soto, 2013, “The Challenge of Public Pension Reform in Advanced and Emerging Economies,IMF Occasional Paper, 275.

    • Search Google Scholar
    • Export Citation
  • Clements, Benedict, Kamil Dybczak, Vitor Gaspar, Sanjeev Gupta, and Mauricio Soto, 2015, “The Fiscal Consequences of Shrinking Populations,IMF Staff Discussion Note, SDN/15/21, October.

    • Search Google Scholar
    • Export Citation
  • OECD/IDB/The Wold Bank, 2014, Pensions at a Glance: Latin America and the Caribbean, OECD Publishing.

  • SSA 2016: Social Security Programs Throughout the World: The Americas, 2015. SSA Publication No. 13-11802, March 2016.

  • United Nations, 2015, World Population Prospects: The 2015 Revision. Key Findings and Advance Tables.


Prepared by Frederic Lambert.


This subsidy is offered considering that the PAYG system is partly government funded.


The Latin American region includes Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay, and Venezuela.


Law 16.173 creating the mixed system allowed BPS affiliates older than 40 years on April 1st, 1996, to remain in the old “transition” system. In contrast to pensions in the mixed system, pensions paid by BPS in the transition regime are not capped (since workers contribute based on 100 percent of their wages), so pension expenditures are higher.

Projections for both contributory and non-contributory systems until 2060 are from BPS (2015). They are extended up to 2100 using the following pension identity (Clements and others, 2013), assuming constant elderly coverage, employment and replacement ratios, and compensation share of GDP:
PEGDP=population60+population1560Old-age dependency ratiopensionerspopulation60+Elderly coverage ratioaveragepensionaveragewageReplacement ratepopulation1560workersInverse employment ratiolaborincomeGDPLabor share of GDP

where PE/GDP denotes the ratio of pension spending to GDP, population 60+ is the population aged 60 years or older, and population 15 – 60 is the population between ages of 15 and 60.


The present discounted value of spending increases gives a sense of how much these increases could add to public debt in the absence of reform. In contrast to the present discounted value of future deficits, it does not require any explicit assumption about the path for revenues, which facilitates cross-country comparisons. The computation assumes an interest-growth differential of 1 percent, as in Clements and others (2015).

The value of the annuity payment for an individual retiring at age j at time t is given by:

where Vt-1 denotes the value of the individual retirement account at time t-1, c is the annuity cost (administrative cost), rt is the nominal rate of return, indext is the rate of pension indexation/revaluation (median wage growth), and lej is the life expectancy at age j.


Bolivia, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Mexico, Panama, and Peru.

Uruguay: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.