Santo Domingo.- When people retire in the Dominican Republic, they typically receive an average replacement rate of 30%. In contrast, Spain has a rate of approximately 80%, exceeding the European Union average. How can the Dominican Republic achieve a similar rate?
Although Spain and the Dominican Republic have different pension systems (Spain uses a pay-as-you-go system, while the Dominican Republic has a funded system), they both share the common goal of allowing workers to retire with substantial pensions. The replacement rate indicates the percentage that the monthly pension represents with respect to the estimated salary at the time of retirement. Basically, it determines what a pensioner will receive based on their final salary.
While the original design of the Dominican system is close to a 40% replacement rate, the actual rate depends on workers’ contributions. For example, someone with 20 years of contributions may have a replacement rate of 31%, 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 his individual capitalization account as of September could expect a monthly pension of 20,580.51 pesos upon retiring at age 60 in 2053, which would lead to a replacement rate of 39.54%.
In Spain, where Lozano is from, the average replacement rate is 80%. In this system, workers and employers contribute monthly to Social Security, and a significant portion goes to the pension fund. In contrast, the Dominican Republic has a lower contribution rate, focusing solely on the pension plan.
To address this gap and increase the replacement rate, Lozano suggests incentivizing voluntary and collective savings. This approach aims to encourage higher replacement rates, as people sometimes perceive pension savings as an additional tax on work.
In the Dominican Republic, the Dominican Association of Pension Fund Administrators (Adafp) proposed two years ago a plan to raise the average replacement rate from 30% to 60%. This plan includes measures such as quoting the real salary, strengthening institutions to prevent social security fraud, adjusting the retirement age for younger workers (from 60 to 65 years old), and adapting mortality tables to the reality of the country.
However, these proposals have not advanced beyond their initial presentation and discussion at the local and international level. A bicameral commission charged 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