Under the current conditions, the pensions that under the individual capitalization system Dominicans would receive at retirement age or what is called replacement ratewould be very low, barely 30 percent of the last salary.
Since the replacement rate is calculated by dividing the amount of the retirement pension between the last active salary received and the resulting amount is multiplied by 100, a worker who at the time of retirement earns 15,000 pesos per month would only receive as pension 4,500 pesosso it would lose purchasing power 10,500 pesos, 70 percent.
This makes the current public pension system unsustainable and the situation would worsen even more in the future, if there are no changes, due to the progressive increase in life expectancy.
Changes in the replacement rate into the future depend on future demographic changes (for example, in life expectancy), future economic changes, such as wage growth in real terms, and future changes in pension rules (for example, parametric reforms that have already been enacted, but not yet fully implemented).
To give you an idea of how bad the Dominican Republic is at the level of the replacement rate, the International Labor Organization (ILO) establishes that, after 30 years of contributions, the level should not be less than 45%and even more, the Organization for Economic Cooperation and Development suggests a general rule of 70% of the last salary considering all sources of pension benefits, the inverse of what happens in the country.
There are nations where the pension comes to replace a 90% of last salary.
With the level of the replacement rate that the country has, Social Security contributors would be forced to consider the need to have some savings to face the retirement stage through the contracting private savings products early enough, but given the salary and poverty levels this would be a pipe dream for the vast majority of Dominicans.
The reforms to improve the pension system should not only be limited to increasing contributions, reducing the cost of administering the system and modifying the retirement age, but also to produce structural changes that reduce informality in the economy and create the conditions for the country better wages are paid.
In addition, work must be done on legal strengthening to eliminate evasion, which undermines the financial sustainability of the pension system.