IESS: These are the effects on pensions if the retirement age is increased to 35 years, as proposed by the Commission formed by the Government

Three basic proposals: increasing the years of contribution, increasing the number of prime years and encouraging people to retire later with the obligation of a higher pension. This is what initiated the Citizens’ Commission established by the Government for the pension reform of the Ecuadorian Social Security Institute (IESS) with the aim of giving sustainability to the system, which already presents risks.

Regarding the years of contribution, it is proposed to increase it to five. For example, the current table at age 60 is 360 deposits and would go to 420 contributions; at the age of 65, he would go from 180 to 240 impositions; and those who are 70 or older should have at least 180 contributions, up from 120 until now.

Augusto de la Torre, who coordinates the commission and is also the former head of the World Bank for Latin America, mentioned in recent days that the minimum eligibility requirements are determined by a combination of minimum age and minimum years of contribution.

The IESS Pension Reform Commission proposes keeping the minimum retirement age at 60, but increasing the contribution years to 35

“Therefore, we propose to keep the minimum age: you can retire at least 60 years old if you have completed 35 years of contributions. Then there is a table that lowers the minimum years of contributions needed to the point where you decide to retire at over 60. For example, if you decide to retire at the age of 70, you can do so if you have a minimum of fifteen years of service,” he said.

This proposal was presented this Monday, July 3, to President Guillermo Lasso, and later to civil society, along with others such as the pension calculation. It would no longer be one of the top five years of salary, but the idea is to count the top 15 or 20 years, according to De la Torre, to have a greater scale with what is truly being contributed.

According to experts, it is important not to touch the minimum age for paying contributions, but adjusting to better wages over time is not an appropriate strategy.

“Given the situation in which IESS finds itself, something needs to be done so that the system does not have serious problems in the short term. Not raising the minimum retirement age is advantageous, however, the adjustment to seek an additional five years of contributions must come with a strategy to create more sources of employment“, he confirmed economist Hector Delgado.

The criterion divides economic analyst Jorge Calderón, who pointed out that there is no benefit for the member. “Honestly, I don’t see the immediate benefit for the pensioner, I think it should be based on better care. That when you secure the level of your pension, the services you expect are also secured”.

And he adds that another detail is the contribution of another five years, which amounts to 9.45 percent for the employee and 11.15 percent for the employer. And that, for Calderón, would force citizens to adapt even more. “You have to reduce your spending because your income is not growing at the same level as your expenses are growing. This means that more people continue to contribute for an additional five years and try to insinuate or say that we should not retire so soon,” Calderón asserted.

Analyst Calderón believes that the current situation does not allow for sustainability over time: “It makes no sense to increase the contribution years now if you don’t fundamentally correct it, because in five or ten years there will be the same problems.”

And one of them is the debt of the state, which, although it is legally obliged to pay 40 percent of the state contribution to IESS for the payment of pensions, has not always done so on time.

And this can cause another scenario revealed by Delgado: “I think it will discourage the expectation of receiving a pension, because if 30 years of contributions is not easy, 35 is even worse. However, I believe that a decision needs to be made to make the IESS sustainable”.

In addition to unemployment, says Calderón, who assured that there are already companies that are already liquidating their staff before the age of 20 and thus it will be difficult to continue contributing. Then they will see mechanisms for lowering costs, and one of them, without a doubt, can be the issue of reducing the number of employees, he said.

Diego Salgado, General Director of IESSsaid in Teleamazon that Today’s retirees and those who are about to retire must be “calm” and “calm”. And he mentioned that one of the directions is according to the emergency decree. “And maybe there are other administrative decisions of the Board of Directors. When we find out, we will take some time to analyze the proposal,” Salgado said.

The key is better wages

Experts point out that the most important point of these proposals is the extension of the number of the best salary years for pension calculation. This does not mean that the more it increases the better. On the contrary, it has the opposite effect. Today, the five best years of salary are chosen, but the proposal is to increase each year by one year up to 15 or 20 years.

IESS states on its website that “the basis for calculating the transitional pension will be equal to the average of five years of the best wages or income to which the contribution was paid.” The average of each year’s contribution will be obtained, for which twelve months of consecutive levies will be added and that result will be divided by twelve. After the averages are obtained, the five years with the best wages or wages for which contributions have been made will be selected. And for the calculation of the base for calculating the pension, the sum of twelve months of consecutive levies is added and that result is divided by twelve”.

For example, care current calculation considers that if the worker earns basic salary ($450), at age 60 and 360 deposits (30 years of contributions) you can retire. In this case, the worker started working before 2000, when sucre still existed.

If that person has always earned basic income over the past five years, that means their average monthly salary was $413.80, which gives pension of $310.35 because for 30 years of contributions he would only have access to a coefficient of 0.75 on his average salary (see chart 1).

Moreover, If the Citizens’ Commission’s proposal to change the pension calculation formula is approved, the monthly payment will vary because 15 or 20 years of better salaries need to be counted.

Continuing with another example. A person with 60 years of age and 420 contributions would have access to a pension of $336.21 calculated with the best five-year salaries, but if another number of years with better salaries is counted and instead of five it goes to fifteen, As de la Torre said, That pension becomes $282.86, and if the best salary in 20 years is chosen, it would be $245.28 (see Chart 2).

If we compare the calculation of the five best years of wages with regard to 10, 15, 20 or 25 years of the best wages, there would always be a reduction of the pension for more counted years; which means that the more years taken into account for the calculation, the lower the monthly payment will be (see pictures 1, 2 and 3).

IESS, among its lifetime pensions, is considering an option with no age limit, but a minimum of 480 deposits is required (corresponding to 40 years or more). If a person started his working life at the age of 18, under the current system, he can retire at the age of 58 with this option. With the new proposal, if you are at least 35 years old and contributing, it will not affect you in this case.

But if it is a person who started making contributions at the age of 30, also without interruption and if there is a green light for a new approach, he would not be able to retire at the age of 60 as planned, because he will have to complete 35 years of contributions, i.e., you will be able to do that only at the age of 65. And this was added to the fact that, if the number of the best years is left to chance, the pension will be smaller, which is calculated by the table of coefficients.

What are the coefficients?

The coefficients for calculating the pension can be found on the IESS website. For example, if I already qualify for a pension based on age (60) and years of contributions (40), the formula that currently applies is based on the five best years of earnings.

First, I need to take the annual average to check what were the five best years of wages on record for Social Security.

I then add up the totals of those five best salary years (without tithes or reserve funds) and divide that result by five to get the annual average of the best salary.

I divide that value by twelve months, which is a year, and the result is the best average monthly salary received in all years of contribution payments.

Finally, to calculate the pension, I look for the one that corresponds to my full years of contributions in the table of coefficients. For this example, since there are 40 years of taxes, the coefficient by which I have to multiply my best average monthly salary is 1, which means that if my average monthly salary from my five best years was $413.80, well, that same value will be the one you receive as a pension. But if for that calculation it would be necessary to take more years of better salaries (10, 15, 20 or 25), the pension would fall (see chart 3).

Requirements for acquiring the right to a pension

This is a table of conditions in force to be able to retire with IESS, according to the age of the member and the time of contribution.