Meagre pensions, a precarious health care system

Héctor Béjar
Centro de Estudios para el Desarrollo y la Participación

The government’s neoliberal policies in the 1990s promoted the privatization of social security. Workers who opt for a private scheme cannot return to the state pension fund, and there are no guarantees for the sums contributed if the private insurance company goes bankrupt. Retirement pensions are miserly, there is no unemployment insurance and the informal sector has no protection. There is no unified health system and public medical care is plagued by serious financial problems.In Peru, pension funds and health system fundsoperate separately. The former are organized into a national pensions system anda private system made up of pension fund administration enterprises that wereset up in the 1990s under the government’s neoliberal programme.

Very limited coverage

The social security system consists of three regimes: the National PensionSystem (SNP), the Pensions and Benefits Regime for Civil Services to the State(known as the “Cédula Viva”) and the Private Pension System (SPP).

The SNP is a benefits assurance system with a common accounting fund run on theprinciple of solidarity. Workers contribute 13% of their monthly income, and thestate sets limits on the amounts paid out in pensions, which can vary from aminimum of PEN 415 (USD 130) for disability and retirement pensions after 20years or more of contributions, to a maximum of PEN 857 (USD 267) for allpensioners. In 2005, taking all the kinds of benefits into account, the averagemonthly pension was PEN 461.81 (USD 144), which was 93% higher than the 1997figure (ONP, 2006). In this regime there are 1,154,000 active workers and448,413 pensioners, which makes a total of 1,602,000 affiliated members.

In the 1990s pension funds were privatized and this swelled SPP membershipand meant that new workers joined the individual capitalization system. ThePublic Treasury finances 72.5% of SNP disbursements, representing an expenditureof PEN 2.785 billion (USD
899.9 million). State social security expenditure as a whole is approximately PEN 8.47billion (almost USD 2.74 billion), equivalent to 13.7% of the 2007 budget.

The number of active workers affiliated to the SNP has increased very slowlybecause a high proportion of people in the informal economy are self-employed orare family members whose work in micro-enterprises is not paid. According to arecent World Bank (2004) study, SNP coverage has fallen from 15% of the workforce to 13%.

In the formal economy there are high rates of evasion and non-registration inthe modern agricultural sector and financial services, and even in the publicsector, where workers often do not receive the coverage they should.

Privatization and the weakening public system

The public system was reformed in the 1970s, and in subsequent years thegovernment made arbitrary and illegal use of funds from the pension and socialsecurity systems to pay public employees and even to carry out public works.This bankrupted the state pension fund.

When the SNP was reformed in the 1990s, contributors had to choose: they couldeither remain with the SNP public system or join the recently created SPPindividual capitalization system. The state implemented policies and legislationdesigned to weaken the public system and promote privatization, and as aconsequence it is much easier to join the SPP than the SNP and, while people canswitch from the SNP to the SPP, it is not possible to move the other way (exceptin a few very special cases).

Workers who changed from the public system to the private sector received aseries of benefits: SNP contributions were raised while the rates for SPPmembers were lowered, and the age threshold for retirement in the public systemwas increased to bring it into line with the private system.

Recently, amid increasing protests and pressure from people affiliated to thePension Fund Administrators (AFP) demanding the right to leave the privatesystem, the government passed a law establishing that only those who had joinedbefore 31 December 1995 were permitted to switch from an AFP to the SNP, and atthe time of leaving the AFP they would be entitled to a retirement pension inthe SNP.

In Peru, before privatization, the state social security system was managed bythe Peruvian Social Security Institute (IPSS). The 1990s reform process involvedsetting up two bodies, Social Security for Health (ESSALUD) to administer thehealth care area, and the so-called Social Security Standardization Office(ONP), to take charge of the public pension regime. This new structure meantthat the system was no longer unified and had less autonomy.

When the Alberto Fujimori government came to power, one of its first officialacts was to transfer the pension fund that was controlled by the IPSS to theAFPs while the state took responsibility for the pensioners. In December 1992,the government issued legislative decree No. 25897, and the system went intooperation in 1993 after an intense publicity campaign paid for by the state. Thegovernment openly promoted the new model with a series of legal andadministrative measures. It was established that the responsibility for pensionsof people who stayed with the public system would be taken over by the stateusing funds from the national treasury. The AFPs that were created were owned bythe country’s most powerful banking groups.

Funds without guarantees

Under the current system, workers must opt for either the state pension fund oran AFP. Once this choice is made, they may change to a different AFP, but cannotreturn to the state system. Workers are legally obliged to pay a percentage oftheir income in contributions to the AFP, and this money is used to buy sharesin one of the monopoly enterprises in the country. Contributors are keptinformed every month about where their money is going, but they do notparticipate in any way in decisions on how the money is invested or theownership of the administrating company.

The state arbitrarily set a maximum of PEN 40,000 (USD 15,000) as the value inbond certificates equivalent to the amount of money workers can contribute tothe state pension system before they retire. When workers are with the statefund, this sum is handed over by the state to the AFP, which goes on receivingmembers’ contributions until they retire. Once workers choose a privatepension company they can never switch to another system. The company offers noguarantee as to how the workers’ contributions are managed, and although it islegally obliged to maintain a certain level of reserves, this does notnecessarily constitute a guarantee that members will be reimbursed for theircontributions if the company goes bankrupt.

In April 2007 the AFPs had 3,957,743 members and their total holdings amountedto some PEN 58 billion (USD 18.5 million).[1]

Another worrying trend is that in December 2005 fewer than 50% of SPP membersactually paid their contributions, which means there was a fall in theproportion of people contributing. In 2003 some 1,336,383 out of a total of3,192,503 members paid their contributions, while in 2006 only 1,396,534 of the3,882,185 members did so (SBS, 2006).

To make matters worse, the payment of contributions is often interrupted. Thereare a variety of reasons for this, including financial difficulties inenterprises and evasion and improper retention of funds by employers.

The lack of an integrated health system

The Ministry of Health (MINSA) is the public governing body in the healthsector, but strictly speaking there is no health care system in the sense of agroup of institutions working in a coordinated way in pursuit of pre-establishedobjectives. There are various different institutions that operate under theauspices of the public sector or the social security system, including MINSAitself, which has a network of health centres, ESSALUD (health care services forthe armed forces and the police), the Integrated Health Insurance (SIS) system,and local government health services, which include the Municipality of LimaSolidarity Hospitals.

These institutions are financed by a combination of the state, people who havehealth insurance and the patients themselves. In 2000, households financed 37.3%of health care, employers 35% and the state 24% (MINSA/OPS, 2006).

In Peru, only 20% of the population has social security for health. For another17%, those living in extreme poverty, there is a rather flimsy system run by theSIS, which was set up recently.

Social insecurity

No unemployment insurance

In 1991, the government issued a decree setting up a system calledCompensation for Time of Service (CTS) whereby working people were obliged toperiodically deposit a sum of money stipulated by this legislation into an opensavings account at a bank of their choice. The CTS was designed to operate as anunemployment insurance system, but the amounts deposited were very small. Ashort time later, as part of a package of measures to reactivate the economy, itwas decided that workers would be given access to one half of the fundsdeposited. The claim that this savings fund was meant to cover unemploymentbenefits lost even more credibility.

Childhood and youth without public support

In this area there are three initiatives in operation, the 2002-2010 NationalAction Plan for Children and Adolescents, the 2006-2011 National Youth Plan andthe National Youth Policy, but they all lack funding.

The unprotected informal sector

People who work in the informal economy have no protection, which means thatmore than 70% of the population does not have social security. The governmenttried to tackle this situation in 2000 by setting up the SIS, to provide somesupport for children aged four and under, children between the ages of five andseventeen, pregnant women, and adults in emergency situations and other specificcategories. Although this is not explicitly targeted at the informal economy,workers and micro-enterprises that have no insurance can take advantage of it iftheir place of residence is in one of the geographical areas that the SIS hasclassified as extremely poor, using data from the National Institute ofStatistics and Information. In practice, most SIS benefits go to children andpregnant women.

In 2006 the SIS provided assistance for some 4,620,000 people, mostly childrenunder 17 years old and pregnant women, but it ran into serious financialdifficulties as it operates through a system of reimbursement for consultationsthat take place in state hospitals that are affiliated with the programme, andit is funded from the public treasury.

Financial assistance for extreme poverty

There is a state system for distributing free milk and food that reaches aboutsix million families in the country, out of a total population of around 28million. Since 1990 there have been many social programmes aimed at peopleliving below the poverty line. The most far-reaching include the “glass ofmilk for children under seven” programme and a contribution to public kitchensfrom the National Food Aid Programme, which provide food rather than financialsupport.

According to the government there are 80 social programmes of different kinds,but these will soon be reorganized into 20 programmes as part of adecentralization process.

The government has also set a target of reducing chronic malnutrition inchildren under five years old from 25%, the current national average, to 20% by2011.[2]

In 2005 the government set up a National Programme of Direct Assistance to theVery Poor – more commonly known as the Juntos (“Together”) Programme –which was based on the Opportunities Programme in Mexico. It involves giving anincentive payment of
PEN 100 permonth (USD 1 per day) to the poorest women and families in the country,to be used as they wish. In exchange, the programme ensuresthat the women themselves and their children have or obtain a national identitycard; that they receive pre-and post-natal medical checks, vaccinations, andgrowth and development checks for children; that they receive a nutritionsupplement supplied by the Ministry of Health; that children attend and remainin school; and that they have access to safe water (potable or boiled). That isto say, it provides “health, education, nutrition and identity.”

Juntos operates in 638 rural districts where there is extreme poverty, and italso assists families that have been affected by violence, in line with a listdrawn up by the Ministry of Economy and Finance. The programme reaches some250,000 ‘benefit units’.

A ‘benefit unit’ is a family group that lives in a permanent home andincludes children 14 years old or younger and/or pregnant women. In 2007 thegovernment announced that it would change the focus of the programme to childrenunder five. The benefit unit’s representative is the eldest mother or pregnantwoman in the family group with children in the required age range. The programmemakes a four-year commitment which may be extended to another four throughrenewable annual agreements for decreasing amounts. In 2007 the programmeassisted around 250,000 families with an operating budget of some PEN 400million (USD 125 million).


MINSA/OPS(Ministry of Health/Pan-American Health organization) (2004). Peru: Cuentas Nacionales de Salud: 1995-2000. Oficina General de Estadística e Informática. Oficina General dePlaneamiento Estratégico. Lima: MINSA.

ONP (Oficina de Normalización Previsional) (2006). Sección de InformaciónGeneral /Estadísticas (online).
Availableat: <>.

SBS (Superintendencia de la Banca y Seguros y AFP)(2006). Monthly InformationBulletin. December 2006 (on line). Available at:<>.

World Bank (2004). “Peru: Restoring the Multiple Pillars of Old Age IncomeSecurity”. Report No. 27618. Washington D. C.: World Bank.


[1] <>
[2] <>