Uruguay: State pension reforms approved

Employer Action Code: Monitor

Parliament has approved sweeping reforms of the social security retirement system that will, among other things, increase normal retirement age (NRA), introduce early retirement options and allow retirees to work while drawing a pension. The legislation also modifies the social security defined benefit (DB) pension formula; eliminates the income floor for compulsory employee participation in social security’s defined contribution (DC) retirement program; and will consolidate the general social security program with separate programs for the military, the police, banks and professionals as a single system covering almost the entire workforce.

Key details

The most notable changes introduced by Law No. 20130 include:

• NRA under social security will increase from age 60 to 65 for members born in 1977 or after. For members born between 1973 and 1976, NRA will increase by one year per additional year of age, i.e., to 61 for individuals born in 1973, to 62 for individuals born in 1974 and so on. Accordingly, the NRA changes will affect members claiming a retirement benefit starting January 1, 2033. The requirement of at least 30 years of insured employment in order to claim a pension remains unchanged.
• Insured employees born in or after 1976 will be eligible to commence an early retirement pension at age 63 if they have at least 38 years of insured employment or at age 64 with 35 years of coverage. Members born in 1973, 1974 and 1975 will be eligible for early retirement at ages 60, 61 and 62, respectively, if they have at least 40 years of insured employment. Employees do not have a general option to retire before NRA under prior law.
• Starting August 1, 2023, insured members will be able to work while receiving a pension, provided the employment relationship is with a new employer and it started after claiming pension benefits.
• Starting December 1, 2023, all employees will be required to participate in the social security individual DC account program (employee funded) regardless of monthly income. The current minimum income floor for required employee participation — i.e., 78,770 Uruguayan pesos ($U) per month — will no longer apply.
• Also from December 1, 2023, the allocation of employee contributions to the general DB and individual DC programs (i.e., 15% of covered pay in total) will change from a 50/50 respective split to a two-thirds/one-third split on earnings up to $U107,589; all contributions on higher earnings (up to the covered earnings limit of $U215,179) will go to the DC program. Social security contribution rates for both employers and employees are unchanged.
• For individuals retiring on or after January 1, 2043:
• Pensionable pay will be based on average indexed monthly earnings over the employee’s best 20 years of earnings. Currently, it is based on the higher of the average for the 10 years before retirement and 105% of the average for the best 20 years of earnings.
• The DB pension amount at NRA will be calculated as an accrual rate of 1.50% multiplied by pensionable pay and by years of insured employment. The rate will be reduced for early retirement (to a minimum of 1.20% for early retirement at age 60) and increased for retirement after NRA (to a maximum of 1.96% at age 70, subject to a maximum benefit of 85% of covered earnings). The current formula is 45% of pensionable pay, plus 1% of earnings per year of coverage for years 31 to 35, plus 0.5% for years 36 to 40.
• Individuals claiming a benefit between 2033 and 2042 will be subject to a combination of the current and new calculation rules.

Employer implications

Uruguay’s aging population, along with a low birth rate and an increased life expectancy, have raised concerns about the sustainability of the social security system. According to the government, public spending on pensions equals 11.1% of GDP, well above the OECD average of 7.7% and on par with Spain (with public spending equal to 11.3% of GDP according to OECD data). The reforms are intended to reduce pressures on public spending by requiring that employees work longer (or accept a reduced benefit at retirement) and strengthening the individual DC account program. The changes are not expected to have a direct impact on employers, although the new rules and requirements will affect employees and the local benefit environment.

Contact

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Mariano Thompson

Director, Integrated & Global Solutions

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