You are on page 1of 37
INTERNATIONAL LABOUR OFVICE An Actuarial Report on the Costa Rican Social Security Fund by Mark Kormus Ph.D., F.C.A.S., Consulting Actuary Mowrrear, 1945 CONTENTS PREFACE. i INTRODUCTION. . ¢ 1 Part 1. Pensions— Sige “ Bens ond Denaro Ds Data 3 1. Coverage. * 3 2. Benefits... .. 4 3. Wage Groups... 4 4. Investments and Rate of Interest. 5 S. Mortality. ...... 25 6 6. Age Distribution of the lasured Poputation. T 7. Future Generations. . 7 8. Wage Distribution........ : 8 Part Il. Pensions Actuarial Zalution % the Cast sf Benefits 000.0. c cee cse ee Lo. 10 1. Introduction 1a 2. Old-Age Pensions. 10 3. Invalidity Pensions. tt 4, Widows’ Pensions. * esas wane ese «. 12 $. Orphans’ Pensions... ereeeerernenenaar Ys 6. Aid to Entrants at Advanced Ages. ce AS 7. Effect of Minimum Pension Provision wwe visors bE 8. Future Generations. ....... feck 16 9. Present Value of Contribution: WwW 10. Summary—Actuarial Balance i 11. Conclusion . eee 18 Parr ll. Health Insurance... 20 1. Introduction. 20 2. Present System... 2 3. Proposed System and Es . oe OE 4. Summary. mad a amin ett oa srerouern 3D COMEHOSTON:. «ous eoss evens couse reas 3t APPENDICES. 32 fF Calculation of the Present ‘Value of Pension Benefits. 32 - Calculation of the Cost of the Minimum Pension Pro- vision . M1. Basic Probabilities and Commutation ‘Columns Oi per cent.)—Selected Ages..... 36 PREFACE Dr. Kormes prepared in 1943 a report outlining a system of benefits and providing an actuarial analysis of their cost, for the consideration of the newly formed Social Security Fund of Costa Rica. As Dr. Kormes is the first to point out, he has relied toa con- siderable extent on methods and material used by Dr. Schoenbaum, Actuarial Consultant to the International Labour Office, in his actuarial report on the Mexican Social Insurance Act, but the latter document is out of print and was never translated into English. The International Labour Office believes that the publica- tion of a summary of Dr. Kormes’ report will mean a useful addi- tion to the literature of actuarial science in its application to social insurance. INTRODUCTION The Costa Rican Social Security Act!, approved by the Legista- ture on 1 November 1941, states that the compulsory social in- surance system “shal! cover the risks of sickness, premature in- validity, old age, death and involuntary unemployment; it shail also comprise maternity benefit, assistance towards the cost of maintenance of a family, and provision for widows and orphans” Aside from this general statement embracing a wide range of risks there is no further mention of the nature and extent of benefits, and the determination of the rates of contributions as well as the benefits or pensions is relegated to the Administration of the Social Security Fund. § 15 of the Act provides that the Fund shail begin its operations’ by instituting old age-and maternity insurance. In actual practice, however, when the Fund began its operations on 1 September 1942, the coverage was applied to the risks of sickness and ma-~ ternity. In order toextend the coverage to other risks, and in Particular those covering old age, invalidity and death, the management of the Fund, in collaboration with the International Labour Office, engaged the writer to undertake an actuarial study and to make recommendations for a sound system of benefits and con. tributions. The results of this study are presented in this report. It deals with two classes of benefits. One comprises pensions for the aged, invalids, widows and orphans; the other sickness and maternity benefits and medical care. The method of approach was in general composed of three phases. The first question to be resolved was the nature and extent of the benefits to be granted. ‘The second problem was that of the deter- mination or selection of appropriate demographic and statistical material on which to predicate the calculations. The third and final phase was the computation of the estimate of the cost of the benefits and the contributions required. I was always guided by the principle of social justice and combined it with moderation required for a sound financing of the scheme. ‘Cf, INTERNATIONAL Lapour Orricy; Legislative Series, 1941, CR. 1, 2 COSTA RICAN SUCTAL SHCURUTY FUND. The short time at my disposal (the entire study was made in less than seven weeks) and the lack of statistical and biometrical data, required the appropriation of foreign experience, results of studies made in other countries with more or less similar condi- tions, as well as the making of quick and far-reaching decisions. The theoretical defects and inaccuracies arising under such circum- stances were unavoidable. I trust that they will result in overesti- mates of the cost, rather than in underestimates. I have leaned heavily on the study made for the Mexican Social Security Project by Dr, Emil Schoenbaum', eminent European actuary, at present with the International Labour Office. I have also utilised the text of Dr. Lucien Féraud: Actuarial Technique ond Financial Organisa- tion of Social Insurance.* Like all such studies of “preparatory” character, this report constitutes only a rough estimate and should not be looked upon as the ultimate solution of the problem. On the contrary, frequent revisions will be necessary in order to keep up with the changing economic and social conditions of the country and to reflect the actual experience of the Fund based on adequate statistical data. “ diorms Finonciero Actuarial, Anteproyecto de Ley det Seguro Sociat (Mexi- co, D.P., 1942), . aInreRNatiONAL Lasour Orrice, Studies and Reports, Series M (Social Insurance), No. 17 (Geneva, 1940). PART I PENSIONS—SCOPE OF BENEFITS AND DEMOGRAPHIC DATA 1. CoveRAGE The original Act, approved on 1 November 1941, is compulsory only as respects employees and workers earning 3,600 colones per annum or less. This provision has two very serious disadvantages in the first place it results in an adverse selection, in that only the lJower strata of the population are insured and therefore the greater part of the cost is placed on the shoulders of those who can least afford it. Furthermore, it tends to increase the number of future entrants at advanced ages whenever their income falls below the limit, and would require higher contributions from those who, having been insured for years, have reached earnings in excess of the limit and would not enjoy the benefit of the contributions made by the employer. The other aspects are the innumerable difficulties of the administrative procedure, such as the necessity of constant payroll audits, the uncertainty of just what individuals and how many will remain in the insurance scheme, the ever-present stream of entrants to, and exits from, insurance. These factors would not only make actuarial calculations difficult but would also tend to increase the cost of insurance and administration expenses. For the above reasons I recommended a change in the Act which would make the insurance scheme obligatory for all workers or employees as respects the first $4,800 of annual wages. This recommendation has been accepted and is incorporated in the revised Act, effective on 22 October 1943.! Of course no attempt should be made to put the law into effect immediately in all parts of the country. Owing to local conditions and difficulties of transportation, a gradual process is indicated whereby the scheme is first introduced in the cities and towns of the central plateau and then gradually extended as conditions permit it, until the entire working population is covered. + Cf, INT#RNATIONAL Lawour Orrice: Legislative Series, C.R. 2. 4 COSTA RICAN SOCIAL SHCURITY HUND 2. Benerirs There are no benefit provisions in the Act. During the first year of operation the Fund has issued regulations granting death benefits in lump sums ranging from 100 to 1,200 colones, according to the salary or wages of the assured. The granting of lump sum benefits is, in my opinion, not desirable, because it does not fulfil the objectives of social security. The money is almost invariably spent quickly and unwisely, so that the dependants are destitute and in want within a very short period of time after receipt of the benefit. For this reason it was recommended that payment of lump benefits be discontinued.* ‘A more difficult problem was the setting up of a scale of benefits which would be both adequate and would not require contributions that would place too great a strain on the economic life of the coun- try. After careful study I recommended the following scales of benefits, corresponding in the main to the Mexican system of benefits: ‘TYPE OF PENSIONS Blemeatot benefits Old age snvalidity Widows ‘Orphans Payments: For life, Forlifeor For lifeor Until age of retirement until cessation until 16 years at age 65 of invalidity remarriage Minimum 750 weekly 250 weekly 250 weekly 250 weekly qualifications: contributions contributions contributions contributions (1S years) (5 years) GS years) years) Basic pension: 20 percent. Sameasfor 40percent. 20 per cent. of average old age of old age or of old age or earnings invalidity invalidity between fourth and fifth year of insurance Increments: i percent. Sameasfor 40 percent. 20 per cent. of wages for old age of old age or of old age or each year of invalidity _invalidity contributions alter the fifth Minimum: 30 colones “30 colones 12 colones 6 colones per month permonth per month —per month 3. Wacz Grours In the first year of operation the Fund has experienced consider- able difficulties and expenses in connection with the collection of contributions and the keeping of records of individual accounts. Instead of calculating an exact percentage of wages the use of 1 This recommendation has been adopted. 9 wage geoups Was introduced upon my recommen: wage group would have an average rate of contributions aud farly average benefits will accrue for each such wage group. The wage groups can be seen below and have been adopted from the Mexican system.! Wage group. Daily wages (colones) Corresponding amounts have been set up where wages are paid weekly, semi-monthly or monthly. 4. INVESTMENTS AND Rate or INTEREST The revised Act (effective 22 October 1943) states in general terms that the investments must be fully guaranteed and produce an adequate income. It is prohibited to make speculative invest- ments of any kind; to purchase stocks of corporations in which the members of the Board of Directors or the personnel of the Fund or relatives of these up to the third degree are interested to make loans of less than 20,000 or more than 1,000,000 colones, the latter without approval of the Legislature Loans to the State or muni- cipalities are permitted only if they are secured by real values and if they produce satisfactory interest. It is not my desire to make any criticisms of the above provisions. I only wish to point out that there will be rather substantial sums of money involved and that the proper management of the invest- ments ta insure the security of principal and interest is of para- mount importance to the Fund. Inasmuch as the flow of large funds into investment channels has the well-known effect of lowering the rates of interest and in view of the general world tendency towards lower interest rates, I have decided that an interest rate of 314 per cent. is the highest rate which can be used with safety in the calculations. It must be emphasised in this connection that it will be necessary that all pension reserves be invested so as to produce on the average at least 3}4 per cent. after deduction of the investment expenses. UE, Scuomnpaves, op. rit. 6 COSTA RICAN SOCIAL SifCURITY FUND 5. Morraury There are no accurate and reliable data available for Costa Rica which could be used with safety as a basis for actuarial calcula- tions. The last census was conducted in 1927, but the results were never published and from the examination made by me of some details, it appears that the value of the information would be questionable. Nevertheless a local mortality table was constructed by Walter Dittel’, actuary of the Banco de Seguros, a national insurance monopoly. This table was based on the above-mentioned census and death statistics of several years thereafter. Although of doubtful value and roughly graduated to fit a second degree parabola, this table gives some indications of what may be expected, and helps in the selection of an appropriate table to be used as a base for the calculation of the value of pension benefits, The com- parison with Hunter's tropical table of mortality, shown below in table 1, indicates that for the lower ages the local experience shows lesser mortality rates, but as the ages advance the differences are less marked: TABLE 1. COMPARISON OF MORTALITY RATES OF HUNTER’S TROPICAL " TABLE WITH DITTEL’S COSTA RICAN MORTALITY TABLE ox & Age “Hunter's Tropical Ditte's Gata Rican "Taste ‘pubte 15 00964 -00385, 20 00903 oC 25 01048, 00895 30 01131 -01030 35 01259 01180 40 01464 01375 45 01786 01674 50 02296 -02130 SS 03098, -02875, 04357 04200 65 06321 05999 70 09345, 08615, 7S 13945 1264 80 20760 18500 I felt, therefore, justified, in agreement with the Latin American reports, in adopting Hunter's tropical table as a basis for my calculations. In this connection it is recommended that the Fund should establish immediately a proper foundation for the collection of the necessary dala from which there could be constructed. a table of mortality of the insured population, 1 J, Walter Ditrey: “Tabla de Mortalidad de la Poblacién de Costa Rica”, in Revista deb Banco Nacional de Costa Rica, No. 20, Apr. 1942. CeNteNd SCOPR AND DRSTMAPIN wee 6 Ace DisrRinunion oF tit [NsuRTD POPULATION The very first statistical investigation instituted by the writer was the determination of the age distribution of the insured popula- tion of the Fund. The declarations made by the entrants during the first year were utilised for this purpose. It was found that only about one third of such declarations contained the age of the assured and this sample was composed of 12,796 males and 3,083 females. The distribution by quinquennial age groups shows a remarkable similarity with that of the Mexican workers given in Schoenbaum’s actuarial report, not only as respects age groups but also the pro- portion of male and female workers. The weighted average age of my distribution is 29.3 years and that of the Mexican distribution is 30 years. Since the Mexican distribution is based ona consider- ably larger number of workers, and because of the tendency of ‘women to understate their ages, I felt that it will be safer to use the Mexican distribution. Table 2 gives the comparison of the two distributions, as well as the distribution reduced to a radix of 100,000. Information on the total number of eventual assured persons is not available and rather than lose myself in idle specula- tions] felt that the calculations based on a radix of 100,000-will give results which will be applicable to any number of assured persons, following in this the procedure used in the Mexican report. TABLE 2, A COMPARISON OF THE DISTRIBUTION BY AGES OF MEXICAN WORKERS AND 15,350 ASSURED PERSONS OF THE COSTA RICAN SOCIAL SECURITY FUND Mexico Conta Rica a | aw 2 ret Age groups /Cemtraly ay a) s 6 a radix of sue | wumber | rersemage | Nuwnher | Percentage | “Yono00 ‘of of oh aseured of Mx workers telat persone ‘etal 13to17| 15 | 30,112 11.6 2,001 13.0 1s42 | 18 to 22} 20 | 50,867 19.5 3,402 22.2 19.497 | 23to27| 25 | 45,437 11.4 2.654 17.3 17,415 28to32! 30 | 43.148 | 16.5 2,398 15.6 | 16,538 $3to37} 33 | 30746 | 118 1,640 OT) £4,785 38042} 40 | 28589 | 11.0 1079 nz 10,958 43 t047| 45 | 13,149 5.0 857 5.6 5,040 48952} 50 | 12,094 £6 699 4.5 4,635 $3 to 57] 55 | 6,758 2.6 520 34 2,590 Total | — | 260,900 | 100.0 | 15,380 | 100.0 | 100,000 7. Forure Generations In the calculation of social security pensions the effect of the future generations on the average rate is of paramount importance. 8 COSTA RICAN SOCIAL SECURITY FUND There are several methods of determining the number of future entrants, but in my case there were not available any reliable statis- tical data to form a basis for an estimate. In the Mexican actuarial report Dr. Schoenbaum, on the basis of statistical investigations, arrived at 10 per cent. of the present generation as a reasonable and safe figure to use for this purpose. In view of the small popula- tion of Costa Rica, I felt that a somewhat lower percentage should be used, especially as the post-war changes in economic conditions will have a more marked effect on this country than on Mexico. I have therefore decided to use 7.5 per cent. as the percentage of new entrants and feel that Dr. Schoenbaum’s assumption of an average age at entry of LY years can be adopted with safety. Another important element with respect to the future genera- tions is the assumption that the total number of workers increases in proportion to the growth of the total population. I was able to find statistical data on the growth of the population in a report by the Department of Public Health.1 These statistics give the following percentages of annual increment: Increase of Increase of Year population Year population Year ‘per cent. ‘per cent. 1927 1932 2.2 1937 1928 1933 2.5 1938 1929 1934 2.2 1939 1930 1935 24 1940 1931 1936 2.5 1941 Even though the last few years show higher values than the average, I felt that the use of the increment of 1.5 per cent., on the basis of the statistical investigations in the Mexican report, offers greater security. It is well known that as time progresses and a greater density of population develops, the rate of births declines and the population tends to be stationary. How long a period of time will be necessary to arrive at that stage in Costa Rica it is impossible to predict, but since my calculations embrace 50 years of future generations, the cautiousness of the Mexican report in the selection of the low value of 1.5 per cent. seems justi- fied. 8. Wace DistRipuTion l have made an attempt to secure a wage distribution by ages, which is of great importance in quantitative calculations, but found that the only information available was from the declarations made by a small group of assured persons. I show, in table 3, the average annual wages based on an analysis of 11,010 declarations. The 1 Memoria de la Secretarfa de Salubridad Piiblica y Proteccién Social (San Jose, Costa Rica, 1942).