Paraguay’s Ministry of Economy and Finance (MEF) has stated that proposals to increase taxes are not a viable way to finance the deficit in the state pension fund, known as the Caja Fiscal. Deputy Minister of Economy and Planning, Felipe González Soley, affirmed this position during a work meeting with legislators from the Permanent Commission of the National Congress. The meeting also included former finance ministers, economists, and representatives from production guilds, talking about the treasury pension deficit.
This clarification comes in response to suggestions from teacher, police, and military sectors. These groups proposed covering the system’s imbalance through higher taxes. The meeting, held mid January 2026 in the Paz del Chaco hall of the National Congress, focused on the current state of the public sector’s Retirement and Pension System. It also addressed the reform bill promoted by the Executive Branch, which is currently under review by the Legislature.
Analysis reveals tax hikes are unsustainable
During the session, Liz Coronel, the MEF’s Manager of Economic Development, presented a detailed analysis. As part of the technical team accompanying Soley, she outlined the financial situation of the Caja Fiscal and its projections. Coronel reiterated that a tax increase cannot be considered a sustainable reform option.
She provided a specific estimation based on the sectors’ proposals to raise taxes such as Personal Income Tax (IRP) and Value Added Tax (VAT).
“We made an estimation based on the proposals from these sectors, which suggest raising taxes like the IRP and VAT”, Coronel explained. “In the case of the IRP – purely for illustrative purposes and not constituting an MEF proposal – it would be necessary to increase the rate from 10% to 48% in 2025. According to the demographic dynamics of the Caja Fiscal, this would imply successive increases each year, reaching 86% in 2028.”
Treasury pension deficit set to outpace revenue gains
Regarding VAT, she noted a proposal exists to raise the rate from 10% to 14%. However, Coronel clarified that even with this increase, the resources would still be insufficient.
“An increase in VAT to 14% would allow for the collection of more than US$1.144 billion annually, which would only be enough to cover the estimated deficit of the Caja Fiscal in 2026 and 2027, and just a part of the one corresponding to 2028″, she detailed.
Throughout her presentation, Coronel identified the absence of a minimum retirement age as the main factor in the imbalance of the system, which is currently financed by general taxes, primarily benefiting the sectors of National Teachers, University Teachers, Military Forces and Police.
Opportunity cost of covering pension shortfall
The ministry issued a stark warning about the future financial burden. “100% of the Caja Fiscal‘s deficit in 2028 will have to be covered with general taxes. This will represent approximately US$683 million, according to actuarial estimates, an amount very close to the limit established by the Fiscal Responsibility Law”, Coronel warned.
Furthermore, she highlighted the significant opportunity cost associated with this expenditure. She added that US$683 million could instead finance the construction of 10 high-complexity hospitals or provide pensions for 86% of the elderly population. The same funds could also be used for the refurbishment of 350 educational centres, the paving of more than 3,200 kilometres of asphalt roads, and the implementation of 16,000 hectares of sanitary sewerage.
Details of the proposed reform bill
In contrast to tax hikes, the government’s bill proposes structural reforms addressing the treasury pension deficit. Coronel explained that the project introduces a gradual retirement access rule starting at 57 years of age for sectors including the National Magisterium, University Teachers, Judicial Magistrates, Police, and Military. The plan includes substitution tables that reward longer periods of activity and higher contributions.
“For the National Magisterium, University Teachers, and Judicial Magistrates, the substitution rate ranges from 78% to 100%, provided the minimum requirements of 57 years of age and 25 years of service are met. In the case of the Public Forces, the rate starts at 50% with 20 years of service and can reach 100% with 35 years of contributions”, she specified.
In addition, the proposal includes an employee-employer contribution scheme. This involves an increase from 16% to 19% for all contributors to the Caja Fiscal. The State, in its capacity as an employer, would also make a specific contribution of 3%.
Finally, the bill proposes a homogeneous calculation base. This would consider the work history of the last five years of contributed salaries. This criterion is already applied in the civil programme, which includes administrative officials, teachers, and magistrates. The complete pension system reform bill and the technical presentation are available on the MEF’s institutional website.
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