- A reliable tool with secondary benefits
He Nobel Prize in Economics, Robert Mertonpresented an innovative proposal to solve one of emerging markets’ most pressing challenges: how to finance retirement while spurring infrastructure development and strengthening the government bond market.
It was during the Conference for the 30th anniversary of Fundación Capitalwhere he explained how the Retirement Security Bond (RSB) works, a financial instrument that could change the way countries approach their citizens’ retirement security.
The RSB works like a government bond that is specifically designed to replicate pension payment flows.
In contrast to conventional instruments, this bonus guarantees a constant, inflation-adjusted income throughout your entire retirement age or consumption, thereby eliminating the reinvestment risk that so worries savers.
The simplicity of its design contrasts with the complexity of the problem it solves: also provide access to workers in the informal sector to a reliable pension system.
Merton forcefully explained why only governments can issue this type of instrument. States have the unique ability to ensure real long-term flows, They have income that is naturally linked to pension payments such as VAT and they have the necessary institutional infrastructure to spend it without additional costs.
Aside from that, The RSB fulfills public goals that the private sector simply cannot achieve: universal pension financing, fiscal stability and long-term economic development.
A reliable tool with secondary benefits
The secondary benefits of RSB are equally relevant. The instrument produces a stable domestic demand for government debt, reducing dependence on volatile external financing.
Aside from that, improves the fit between long-term investments and their financinga chronic problem in emerging markets. And through the development of the local bond market, future issuance costs for the state can be significantly reduced.
The The practical feasibility of the RSB was demonstrated with RendA+, which was implemented in Brazil in January 2023. This first case has shown that emerging countries can successfully adopt the instrument with affordable starting amounts and predetermined conditions that adapt to the specific needs of each country.
The RSB acts as a government bond that is specifically designed to replicate pension payment flows. Unlike traditional instruments, it guarantees a constant income adjusted for inflation or consumption, thus eliminating the reinvestment risk that so worries savers.
During his talk, Merton also took part in a conference with the Argentine economist Martín Redrado, who spoke about the path of macroeconomic convergence necessary to create predictability in key economic variables.
The complementarity between both presentations was obvious: Without macroeconomic stability there are no sustainable financial instrumentsbut without financial innovation there are no real solutions to structural problems such as pension insecurity.
The RSB therefore represents a concrete example of how the Financial innovations can solve multiple public policy challenges simultaneously, This offers a concrete alternative for countries that want to strengthen their pension systems without jeopardizing their fiscal stability.
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