Simulation of the Ecuadorian Social Security Institute Funds Sustainability Addressing Government Contribution to Retirement Pension in 2015

Abstract

The Ecuadorian Social Security Institute (IESS) operates on the principles of solidarity, obligatoriness, universality, equity, efficiency, sufficiency and subsidiary. However, its distribution system is easily affected by changes in demographic variables and the Government reduces the system volatility by subsidizing some liabilities. In April 2015, the Government announced a new reform which stopped a 40 % compulsory contribution to the social security retirement pensions. Some analysts affirm that the IESS cannot be sustained longer than 10 years with its current operational features. This study seeks from an impartial academic perspective to simulate the social security system using the system dynamics methodology including demographic and macroeconomic variables in order to determine the number of years that the IESS can operate. Because of this simulation, different policies were tested in order to get a correct path to funds sustainability. As a final conclusion to this model, In Ecuador, eliminating the subsidy in 2015 without changes in the IESS operations would reduce the funds until exhausting them in 2030. If the expense parameters per enrollee could vary as simulated in the Monte Carlo process showed in this paper, it is more likely that the funds run out between 2028 and 2039.