BlackRock Retirement Institute

The Latin America demographic
dividend potential

Oct 30, 2017
By BlackRock

BlackRock Retirement Institute and the United Nations Population Fund explore how the demographic dividend can lead to long-term economic growth and fiscal stability for the largest national economies in Latin America.

The demographic dividend, or the period when a country enjoys a relatively large population of working age adults relative to the entire population, provides an attractive window to accelerate economic growth and enhance human capital development. In particular, the dividend can create a foundation to increase retirement savings, as more workers are earning, saving, and investing their income in a more dynamic economy. Ideally, the ripple effect of this virtuous cycle leads to numerous societal benefits county-wide — including higher standards of living and improved retirement readiness.

Increased savings rates are essential for achieving these benefits. Programs that target a variety of related economic and development goals can ultimately empower more individuals to enter the formal workforce and begin to save and invest for retirement. In turn, this surge in saving and investing can drive further macroeconomic and human development benefits — delivering on the promise of the dividend. To accelerate these dynamics, Latin American (LA) countries can consider a variety of steps to significantly increase savings rates.

The economic lifecycle

The core of the dividend’s potential is the close relationship between demographics and economic activity — rooted in the concept of the “economic lifecycle.” This is the pattern of production and consumption that shifts as a society and individuals age. In countries that are benefiting from a dividend, a greater proportion of the population is in the period of the economic lifecycle where their production outweighs consumption. As a result, the dividend can drive short and long-term national economic growth, including:
Savings rate
A greater proportion of the population are in their prime years to earn income, save, and invest
Investment returns
Greater local capital and funding sources expand investment opportunities and can provide higher returns
Productivity
Investment can be allotted to infrastructure that enables more efficiency and return on capital

2016 Aggregate consumption & Labor income by age

Aggregate consumption & labor income by age

Source: National Transfer Accounts, Interactive Data Explorer, Consumption and Labor Income Profiles, 2016, Selected Latin American countries, http://www.ntaccounts.org/web/nta/show/Interactive%20Data%20Explorer


There are significant variations in the economic lifecycles among LA countries resulting from multiple factors. Aggregate consumption is relatively high early in the lifecycle in countries with substantial in-flows of funds from individuals working abroad or where social welfare benefits are contingent on a household’s children attending school (Mexico). Labor income is higher in countries (Argentina, Chile) where economic lifecycles more resemble those in advanced economies.

5 key levers to improve savings and investing rates in Latin America

Opportunity

Increasing the female labor force participation rate can be a catalyst for Latin American countries to accelerate economic growth and raise the human capital contribution from an extended portion of the population. Greater participation creates numerous benefits, from bolstering the number of women saving and investing for retirement to improving gender equality.

Recommendations

Latin American governments can designate a set share of their budgets for healthcare, education, training, and workforce participation programs focused on women. In addition, expanding women’s inclusion in pension systems and access to financial institutions and savings vehicles can help lead to higher female higher savings rates and overall GDP growth.

Female labor force participation in emerging markets

Female labor force participation in emerging markets

Source: World Bank DataBank, Labor force participation rate, female (% of female population ages 15+) (national estimate), 1980, 2010, Seven profiled Latin American countries and advanced economies, http://databank.worldbank.org/data/home.aspx

Opportunity

Currently, fewer than half of people in LA have accounts at financial institutions and among them only 26 percent fully embrace savings accounts. Improving transparency and trust in financial institutions, enhancing competition within the financial system, and lowering costs for consumers are key steps towards encouraging greater savings and engagement with the financial system.

Recommendation

LA countries can introduce financial products and automatic savings programs designed to encourage customers to open and use bank accounts, including simpler, more transparent financial products, and products with “commitment devices” to encourage systematic savings behavior. Financial literacy programs starting with schoolchildren reinforces broader engagement programs.

2010-2015 average market cap and savings rate

Market cap and savings rate

Source: World Bank DataBank, Market capitalization of listed domestic companies (% of GDP), Gross savings (% of GDP), Average of 2010-2015, Argentina, Mexico, Chile, Colombia, Mexico, Peru, http://databank.worldbank.org/data/home.aspx

Opportunity

Underfunded defined benefit (DB) plans, low rates of pension coverage and irregular contribution rates provide an opportunity for LA countries to improve their pension systems for long-term sustainability and higher savings rates. More efficient pension systems with broader coverage can play a vital role in a country’s overall retirement system, as demonstrated by the success of many pension systems in Asian countries and other advanced economies.

Recommendation

LA countries can consider how defined contribution (DC) pensions can promote long-term financial sustainability in light of changes in demographics, longevity, and fiscal realities. Improvements to both DC and DB programs could include revising labor market policies to encourage pension coverage and greater female labor participation, strengthening financial literacy and participant education programs, diversifying into global asset classes, and utilizing sole-purpose pension managers.

2010-2015 GDP growth and share of pension funds in foreign assets

GDP growth and share of pension funds in foreign assets

Source: Beyond Their Borders: Evolution of foreign investment by pension funds, PwC and the Association of the Luxembourg Fund Industry, 2015, p. 15, Available here; World Bank DataBank, GDP Growth (annual %), Average of 2010–2015, Brazil, Mexico, Colombia, Chile, Peru, Japan, Hong Kong, South Korea, and OECD Members. 

Opportunity

Capital markets have a positive correlation with savings and investing rates — but they require strong regulatory frameworks and protections for creditors and shareholders. LA countries can further improve capital markets by providing easier access to a broader set of potential market participants.

Recommendations

LA countries can increase the depth and breadth of capital markets with incentives for new issuers in stock and bond markets, easier capital market access or special market sections for smaller companies, and lowered administrative and tax barriers for foreign investors. Regulatory improvements include strengthening market monitoring, enhancing corporate governance standards, augmenting investor protections, and improving the technology of trading platforms.

Financial development—accounts and savings
% of population with accounts at financial institutions vs. % of population that saves at financial institutions, 2014

Financial development—accounts and savings

Source: Global Findex (Global Financial Inclusion Database), WorldBank, 2015, http://databank.worldbank.org/data/reports.aspx?source=1228#

Opportunity

Though there is significant variation in the region, many LA economies can realize significant benefits by overcoming a historical “home bias” in their investment allocation towards domestic markets and fixed income investments.

Recommendations

LA countries can remove regulatory limits on international allocations and prioritize a more balanced mix of investments. They can also develop investment solutions that allow for higher returns and better risk management, including expanding pension funds to include alternatives, developing voluntary savings products, and designing pension fund products and asset allocations to reflect risk preferences—such as age based “target date” solutions—as individuals invest for retirement.

Pension type, coverage and replacement rates

Pension type, coverage and replacement rates

Source: Pensions at a Glance: Latin America and the Caribbean, OECD, p. 15, Available here; Population Aging: Is Latin America Ready? The World Bank, p. 241, https://openknowledge.worldbank.org/handle/10986/2542

Download the full report