Financing Social Protection in Paraguay

Paraguay has established the foundations of a comprehensive social protection system; however, social protection coverage remains limited, and benefit levels remain low. The Instituto de Previsión Social (IPS) provides pension coverage to private sector workers and health insurance to private sector workers and a limited number of public sector employees. Public sector workers are covered by the public pension scheme of the Caja Fiscal. Central government employees are either covered by private health insurance or receive a subsidy to purchase private health insurance. However, according to the household survey (EPHC), in 2024 only 14% of people aged 65 and over received a contributory pension and only 27% of the population had access to health insurance.1 Individuals who are not covered by social insurance have access to non-contributory universal healthcare for basic healthcare services. Among the main social assistance programmes, coverage of the school meals programme Hambre Cero and the social pension Adulto Mayor has expanded significantly in recent years, while coverage of Tekoporã, a programme that includes a conditional cash transfer, remains limited, reaching only 17% of the poor. Cash transfer benefit levels remain modest, reflecting fiscal constraints. Overall spending on social assistance is limited, at around 1.5% of GDP. Nonetheless, the government has signaled its intention to implement measures to expand social protection coverage and improve benefit adequacy.

Despite decades of sustained economic growth, Paraguay continues to face a persistently high percentage of workers who are not registered in the social security system. Around three-quarters of the labour force do not contribute to social insurance, with private sector employees accounting for the largest share. Only half of private sector employees comply with mandatory contributions. Self-employed workers, who represent approximately one-third of the labour force, are not subject to mandatory social security contributions, and their participation in social insurance remains minimal.

The capacity of public health insurance to expand coverage is currently constrained by ongoing challenges related to financial sustainability. Coverage under the IPS health insurance scheme remains limited, reaching only 21% of the population, of whom approximately 40% are non-contributing dependent family members, according to the 2024 household survey. The introduction of supplementary contributions for the coverage of dependants, including spouses, children and dependent parents, applied to workers with sufficient income could help strengthen the financial sustainability of the IPS health fund. In parallel, improving spending efficiency will be essential to ensure the system’s long-term financial viability.

Paraguay’s main public pension schemes face significant financial challenges. Both the IPS pension scheme for private sector workers and the Caja Fiscal for public sector employees have recorded persistent deficits in recent years and require reform. While the IPS has recently implemented a set of reform measures, additional adjustments will be necessary to ensure long-term financial sustainability. The deficit of the Caja Fiscal – currently financed through general tax revenues as well as surpluses from its sub-funds – amounted to 0.66% of GDP in 2024 and is projected to increase rapidly in the coming years. This report was prepared prior to the approval of the reform to the Caja Fiscal in March 2026. The reform introduced minimum retirement ages for workers in sectors that previously had no statutory retirement age requirements. It also increased the minimum number of contribution years and introduced higher employee contribution rates in specific sectors whose pension schemes were facing financial deficits. Moreover, the reform included the introduction of an employer contribution paid by the state and standardised the calculation rule across public sector professions by requiring the use of at least the average earnings over the last five years as the reference wage for pension calculations, and established incentives for later retirement. The measures included in the reform represent an important step towards restoring financial sustainability, reducing reliance on general tax revenues and strengthening incentives to remain in work and are broadly aligned with the recommendations set out in this report.

The design of the tax and social insurance system creates disincentives to formal employment, compounding broader structural barriers to formalisation such as low-income levels. Participation in social insurance is constrained by low-wage levels and a relatively high statutory minimum wage, which serves as the minimum contribution base. For self-employed workers, voluntary contributions to the IPS pension scheme, calculated at no less than the statutory minimum wage, often represent a significant financial burden while the benefits offered are often not perceived as sufficiently attractive, contributing to low participation. Among salaried formal workers, the provision of free health insurance coverage for dependent spouses reduces incentives for the latter to enter formal employment. In addition, eligibility conditions for contributory pensions, including a minimum of 15 years of contributions for private sector workers combined with relatively high contribution rates, discourage participation among low‑income workers. To address these challenges, Paraguay could consider introducing partial pensions for individuals with contribution histories of less than 15 years. Under this approach, the social pension could be gradually withdrawn as contributory pension benefits increase, while ensuring that combined benefits remain above the Adulto Mayor social pension, thereby strengthening incentives to contribute to the pension system. The additional costs associated with such a measure could be offset by adjusting replacement rates for full pensions as part of a broader parametric reform.

Strengthening the monitoring and enforcement of social security contribution (SSC) payments is a precondition for any reduction in contribution bases or rates. Paraguay faces a trade-off between expanding social security coverage and ensuring the financial sustainability of the contributory system. Setting the minimum contribution based on the level of the statutory minimum wage helps safeguard a minimum level of SSCs per worker, but it can also constitute a barrier to formalisation. Targeted reform approaches, such as the current initiatives aimed at young workers and employees of microenterprises, who benefit from reduced SSC rates, may help promote formalisation over time. However, the effectiveness of these measures should be carefully evaluated to ensure that the formalisation gains are sustained and exceed the additional costs incurred by the IPS.

Non-contributory social protection programmes financed through general tax revenue play a key role in ensuring minimum social protection floors. Paraguay’s main social assistance programmes include means-tested programmes, such as Tekoporã that combines cash transfers with family support, as well as quasi-universal in-kind benefits, including free school meals provided by Hambre Cero and the social pension Adulto Mayor. Full coverage of the eligible populations has not yet been achieved and remains a stated government priority for the Hambre Cero and Adulto Mayor programmes. Extending coverage of the three main programmes – Tekoporã, Hambre Cero and Adulto Mayor – to all eligible households and individuals, respectively, would require an estimated increase in public spending of at least 1.1% of GDP.

Further expansion of Paraguay’s main social assistance programmes will require the mobilisation of additional domestic revenues. Over the past two decades, tax revenues have responded more strongly to economic growth than in Latin America and the Caribbean (LAC) on average. However, the tax-to-GDP ratio (including SSCs) remains very low, at 14.5% in 2023, well below the LAC average of 21.3%. This reflects a combination of low statutory tax rates, generous tax expenditures and high levels of informality.

Current efforts to increase tax revenues focus primarily on strengthening tax administration and improving compliance. Notable progress has been achieved in this area, including the merger of the tax and customs administrations and a growing emphasis on the digitalisation of the tax administration. The combination of enhanced administrative capacity and relatively low statutory tax rates presents an opportunity for Paraguay to further strengthen compliance and gradually broaden tax bases, notably through a reduction in tax expenditures. However, improvements in tax administration alone are unlikely to generate the additional revenues required to finance the expansion of social assistance and other policy priorities over the medium to long term. Once compliance has been strengthened and tax bases broadened, further tax policy measures – including potential increases in tax rates – may therefore need to be considered.

There remains scope to strengthen tax policy in order to mobilise additional revenues over the short and medium term. Key reform priorities include broadening the personal income tax (PIT) base by reducing tax deductions, which currently eliminate tax liability for around half of individual taxpayers, as well as broadening the personal capital income tax base. Corporate income tax incentive regimes have recently been reformed; however, their effectiveness in attracting investment should be systematically assessed and further adjusted if warranted. While VAT is a major source of revenue, its revenue-raising potential is constrained by a relatively low standard rate, reduced rates on basic consumption goods and a wide range of exemptions. Additional revenues could also be mobilised through higher excise taxes on tobacco and alcohol, supporting both revenue and public health objectives, as well as by strengthening environmentally related taxes.