The uncertain path to raising pensions in the Dominican Republic with a longer-lived population

Santo Domingo.- When individuals retire in the Dominican Republic, they typically receive an average replacement rate of 30%. In contrast, Spain boasts a rate of approximately 80%, surpassing the European Union average. The question arises: how can the Dominican Republic achieve a similar rate?

Although Spain and the Dominican Republic have different pension systems—Spain employs a pay-as-you-go system, while the Dominican Republic has a capitalized system—both share the common goal of enabling workers to retire with substantial pensions. The replacement rate indicates the percentage that the monthly pension represents concerning the estimated salary at retirement. Essentially, it determines what a pensioner will receive based on their final salary.

While the original design of the Dominican system approaches a 40% replacement rate, the actual rate depends on workers’ contributions. For instance, someone with 20 years of contributions may have a 31% replacement rate, while those with 30 years of contributions could reach 48%. To improve this rate, Manuel Lozano, a social security consultant with two decades of experience in Dominican social security, suggests increasing contribution rates.

For example, a 30-year-old worker who has accumulated 181,934.61 pesos in their individual capitalization account by September could expect a monthly pension of 20,580.51 pesos upon retiring at age 60 in 2053, leading to a replacement rate of 39.54%.

In Spain, where Lozano hails from, the average replacement rate stands at 80%. In this system, workers and employers contribute monthly to Social Security, with a significant portion going toward the pension fund. In contrast, the Dominican Republic has a lower contribution rate, focusing only on the pension plan.

To address this gap and increase the replacement rate, Lozano suggests encouraging voluntary and collective savings. This approach aims to foster higher replacement rates, as sometimes people perceive pension savings as an extra tax on work.

In the Dominican Republic, the Dominican Association of Pension Fund Administrators (Adafp) proposed a plan two years ago to raise the average replacement rate from 30% to 60%. This plan includes measures like quoting for actual salary, strengthening institutions to prevent social security fraud, adjusting the retirement age for younger workers (from 60 to 65 years), and adapting mortality tables to reflect the country’s reality.

However, these proposals have not progressed beyond their initial presentation and discussion at local and international levels. A bicameral commission tasked with reviewing the law creating the Dominican Social Security System recommended reforms in 2023, including the possibility of achieving a 100% replacement rate based on years of contributions and age.

Source: Mariela Mejia, Diario Libre