When politicians and interest groups do battle on the controversial subject of social security reform, statistics are often the favored ammunition. Numbers, usually big financial numbers, are used by all sides to knock down arguments for or against tampering with the current system. In the process, innocent bystanders are sometimes hit with misleading information.
In Latin America, critics of state-run social security systems often portray them as fiscal sinkholes that consume a huge portion of public spending and discourage job creation because too much of each worker's paycheck is deducted for social security contributions.
This is only partly true. The percentage of direct wage costs represented by social security contributions is indeed very high in some of the region's countries: in 1995 they amounted to around 30 percent of each paycheck in Mexico, Brazil and Colombia, and just over 40 percent in Argentina and Uruguay. These figures include programs for old age, disability, death, illness and maternity, work injuries, and unemployment.
But contrary to popular perceptions, public spending on social security in Latin America is actually very small when compared with industrialized countries. In the graphic below, the vertical axis indicates the size of social security spending as a percentage of each country's GDP. Latin American countries, which between 1990 and 1995 spent an average of only 2.5 percent of GDP on social security, are clustered near the bottom left. Industrialized countries, which spent 16.4 percent, appear in the upper right. That contrast is even starker when social security is measured as a percentage of all public expenditures: Latin American countries devoted an average 9 percent of the national budget to social security, compared to a whopping 35.9 percent in the industrialized world.
There are two basic explanations for the small size of Latin America's social security systems. First, in most countries social security benefits are received only by former public employees and other "formal" employees. Tens of millions of informal workers receive no benefits at all. Second, as the horizontal line on the graphic indicates, the region (with the notable exceptions of Argentina and Uruguay) has a much smaller proportion of people over age 65 than industrialized ones. It is these older citizens who account for the bulk of social security expenditures.