EMPLOYER ACTION CODE: ACT

Faced with a 2018 budget deficit of 2.8 billion Nicaraguan cordobas (roughly $85 million), up from 1.8 billion cordobas in 2017, the Nicaraguan Institute of Social Security (INSS) has changed the system to significantly increase social security contribution rates and substantially lower pension benefits. The February 1, 2019 effective date, followed only four days after an executive decree was signed by the board of directors of the INSS.

KEY DETAILS

Changes to the General Rules of the Social Security law enacted by Presidential Decree 06-2019, include:

  • The employer social security contribution rate for pensions under the IVM (Invalidez, Vejez y Muerte - Disability, Old age and Death) portion of INSS was increased from 10% of capped earnings to 13.5% of uncapped earnings (12.5% for companies with fewer than 50 employees). The employee contribution rate increased from 4% to 4.75%. At the same time, the state contribution rate for INSS health and maternity insurance increased from 0.25% to 1.75%.
  • The total employer contribution rate is therefore now 22.5% (21.5% for smaller employers) under the so-called Integral Regime while the employee rate is 7%. Note: the Integral Regime refers to coverage by all INSS programs including the IVM as well as health and maternity insurance. Employers can opt out of the latter via private insurance.
  • The monthly earnings limit on covered pay (formerly 96,842 cordobas) was abolished. Contributions and benefits are now based on gross pay, subject in the latter case to a maximum monthly pension of the 50,000 cordobas (equivalent of $1,500).
  • The average earnings period and retirement pension formula have also changed. The former is now calculated on an average of the last 375 weeks of uncapped earnings rather than the last 150 to 250 weeks of capped earnings, depending on total weeks of insured employment. The retirement pension is now calculated on a flat 20% of average uncapped earnings plus 1% for each additional 52 weeks of service above 150. In comparison, the prior formula was based on 37% of average capped earnings plus 1.15% for each additional 52 weeks of service above 150 (for claimants with average earning exceeding twice the minimum wage) or 45% plus 1.591% per additional year of credits for claimants with average earnings below twice the minimum wage. The changes appear to be effective for all retirements on or after February 1, 2019.
  • Pension supplements for dependent spouses and children were reduced from 15% to 13.5% and 10% to 9% of the retirement pension, respectively.

EMPLOYER IMPLICATIONS

These measures, intended to enhance the financial sustainability of the INSS system, largely reflect changes proposed by the government in 2018 that were later withdrawn following widespread public protests. The changes are no more popular a year later with the economy in recession, though public reaction has been more muted. Other changes to the system recommended by the International Monetary Fund in 2017, such as raising the retirement age (currently age 60), have not been addressed. Few employers in Nicaragua offer supplemental pension benefits, but the changes will significantly impact employer costs and employee net pay.