The Law of Actuarial alue Transfers:
An attack on social security in Honduras

The sustainability of retirement funds are put in a precarious position by the approval of various laws that favor the transfer of savings from one system to another, say experts within the Central Bank of Honduras.

The Law of Actuarial Value Transfers and of Participants Subject to Double Accounting was approved by Congress in November 2000.

"When a participant in the Social Retirement System changes coverage to another syste, the system the participant enters will recognize the years of service accredited in the former system given that the former system effects the transfer of actuarial value," states Article 1 of the law.

Retirement institutions in Honduras form part of what are called distribution funds that involved the creation of a collective reserve from the contributions of employees and employers that serves the needs of its members when they retire. In Honduras, the management of these funds has been questioned and a discussion is under way to implement reforms, or in extreme cases, to abolish the systems and turn them over to private management.

Experts in the field admit that the funds have faced a series of administrative and financial problems that have placed them in a precarious situation in all the countries they function.

This is not a phenomena exclusive to Honduras, they say. These problems have also plagued the Chilean system, which had been the example to follow in Latin America.

The problems with sustainability originated in the systems' inability to fulfill their obligations through the long-term distribution of benefits. The problem is that members in the system outlast their life expectancies and continue to receive pensions up to 25 or 30 years longer than anyone planned.

"The pension is not sustainable because they [the members] did not contribute enough to still be receiving a pension now. An individually capitalized fund would not being paying them a pension. But a distribution system is obligated to continue paying," explain experts.

Another weakness in the system is caused by Congress's decision, "for political reasons," that the pensions should be adjusted annually. They said this was justified, especially in countries where the value of the currency changes from day to day. But no one knows where the money will come from to achieve these adjustments, in either the public or private funds.

Central Bank experts recognize that the potential for development of these funds is limited in that they are drawing on reserves to meet their obligations. To avoid that lag, experts suggest that a 10 to 1 ratio of contributors to retirees be required. According to this criteria, the most stable funds in the country are those of the teachers and public employees.

Another difficulty is raised because the recent law allows members to transfer their funds from a public system to a privately administered fund.

"It would be a destabilizing factor if the members decided to change their funds from one system to another, year to year, in hopes of earning a little more interest. Just imagine, what would happen if the members of one system decided to change to another, and there weren't enough reserves. These actions are going to generate instability in the retirement funds," warns the expert.

Furthermore, the decision would generate legal conflicts because the funds are public and cannot be transferred to the private sphere, as on Central Bank expert pointed out.

The distribution funds also face the politicization of their administration and membership. Public employees come and go every four years according to political favor, and many employees who enter the system do so for only the time of a political party's power. The employees do not see the pension system as any guarantee of their future because they know they will be in their position for only four years and will only be able to invest that much in the system. These cases tend to erode the system through personal or housing credits. They continue to pay into the system after leaving, but without contributing enough to maintain the reserves.

The experts reveal that the majority of pension funds in Honduras are now working with high deficits. "Only the Central Bank fund does not have a deficit," they explain. The Central Bank fund was created as a distribution fund, but it has matured over time and now could complete the requirements of an individually capitalized fund, they claim.

Another problem facing the law is the revelations of corruption within INPREUNAH, the University system, made by the magazine "Social Retirement Planning".

The table below shows the disparity in contribution rates between employers and individual employees in each of the retirement systems.

Consider what would happen if a retiree decided to transfer her actuarial value from IHSS to INJUPEMP. The costs of the pension to the latter institution would automatically rise because of the difference in benefits and the percentages of employer and employee contributions.

Analysts of the law question whether there will be requirements that the systems publicly report pertinent information for the purpose of solving problems arising from the application of the law. They suggest that a procedural manual be issued to explain the law.

However, these are all unnecessary actions that will only complicate the administrative systems of these institutions and Honduras will continue, as before, without "a State policy of secure social retirement planning," assert the experts.