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By World Bank

"Early retirement and lax eligibility for incapacity are undesirable for the economic climate simply because they lessen hard work productiveness and the provision of skilled employees, and they're undesirable for the approach simply because they impose a heavy monetary burden that makes it nonsustainable." Costa Rica is at a turning aspect with admire to its social safeguard process. whereas part the workforce is roofed and beneficiaries have fared good some time past, the pay-as-you-go (PAYG) pension process is unsustainable for the longer term. This booklet describes the current pension process, its shortcomings, and defends the necessity for pressing reform. It additionally makes tips about easy methods to reform the procedure, what could be replaced first, and precisely what components of the pension approach will be transformed.

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The replacement rate for teachers in reparto is even higherpreviously 100% and, since 1995, over 80% for the typical retiree. These pensions are overly-generous in the sense that workers would probably prefer to have higher take-home pay when young rather than paying the full cost of benefits that they will (possibly) receive when old. As discussed below, we recommend a target replacement rate of 40-50% for full career workers for Page 7 mandatory programs. This allows workers who want larger pensions to save more when young, but it does not force them to pay taxes to shift more income to old age than many would desire.

Workers hired prior to July 1992 are covered by Law 7268, a PAYG system (called the ''reparto" scheme), financed by a 21% payroll tax (10-14% paid by employees, the rest by the Government as employer, with any deficit also the responsibility of the Government). Prior to 1992 the contribution rate was 15% (5% each for teachers, the Government as employer and the Page 3 state) and the typical replacement rate was 100% of final salary, plus indexation to wages which eventually raised the replacement rate still higher.

A. All rights reserved Manufactured in the United States of America First printing January 2000 World Bank Country Studies are among the many reports originally prepared for internal use as part of the continuing analysis by the Bank of the economic and related conditions of its developing member countries and of its dialogues with the governments. Some of the reports are published in this series with the least possible delay for the use of governments and the academic, business and financial, and development communities.

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