New legislation (Decree No. 614) has significantly revamped El Salvador’s compulsory individual retirement account system (Sistema de Ahorro para Pensiones – SAP). Established in 1998, the SAP became the primary social security retirement benefit program (two legacy systems apply to workers covered by social security prior to 1998). The legislative changes are intended to tackle long-standing concerns regarding the system’s sustainability and benefits adequacy by increasing the employer contribution rate and abolishing the cap on covered pay, among other things.
Changes to the SAP, effective January 1, 2023, include:
While the government’s stated aims for the reforms are to improve the system’s sustainability and benefits adequacy, prospects for achieving those goals are mixed. Eliminating the ceiling on covered pay for pension contributions and maximum benefit cap will result in higher costs and lower benefits for highly paid employees. Very few employers (7% of those surveyed) offer supplemental retirement benefits, but the reforms could encourage companies to consider doing so for highly paid employees. Providing supplemental life insurance is very common (80% of employers) — accident death and disability coverage less so. Employers are encouraged to review the new SAP provisions and their employee benefit plans to ensure they are in compliance.