Brazil & Southern Cone - April 2026

President Santiago Peña has accelerated his push to put Paraguay’s public finances on a solid footing with a pension reform that aims to stave off ever larger deficits. The reform of the Caja Fiscal, the public sector retirement and pension fund, represents the most significant overhaul of the Paraguayan social security framework in decades. It came after months of intense debate within congress and amid fierce union opposition and social unrest.

It is the latest episode in a turnaround that has converted Paraguay from an economic basket case into a regional magnet for foreign investment. The country is among the fastest-growing economies in South America, with inflation below the central bank’s target and fast improving public finances.

Paraguay’s central bank said in late March that GDP expanded a whopping 6.6% in 2025, the fastest rate in the past decade. A rebounding agriculture sector (20.8% growth) was the driving force, but power generation, services, construction, and other sectors of the economy also grew rapidly. The International Monetary Fund (IMF) in January gave its seal of approval on the state of Paraguay’s economy, and credit rating agency S&P rewarded Paraguay in December 2025 with an investment-grade rating.

Pension deficits

The Caja Fiscal, which manages the pensions of teachers, magistrates, judicial officials, as well as the police and the military, had been losing increasing amounts of money every year – with an accumulated deficit of US$1.6bn from 2015-2025, according to the ministry of economy and finance. Contributions from active workers were insufficient to cover the benefits of an aging pool of retirees. Specifically, the police, the military, and teachers were the primary drivers of this shortfall. Without intervention, experts warned that the deficit could balloon and threaten the country’s broader macroeconomic stability.

One of Paraguay’s key targets with the IMF is to reduce the fiscal deficit to 1.5% of GDP by 2026. By curbing runaway costs of the Caja Fiscal, the government has significantly increased its chances of meeting this target, thereby maintaining international credibility. Fitch Ratings, the only major agency that has not upgraded Paraguay to investment grade status yet, had cited the deficitary Caja Fiscal as a major concern.

The pension reform’s path to approval was far from smooth. The bill was initially pushed through the chamber of deputies during a parliamentary recess in early 2026, a move that critics labelled a legislative blitzkrieg. This sparked massive protests from teachers’ unions, judicial officials, and police associations, leading the senate to temporarily stall the process to seek a middle ground.

The reform was spearheaded by the ruling Asociación Nacional Republicana –Partido Colorado (ANR-PC), specifically the Cartista wing loyal to Paraguay’s former president (2013-2018) and current ANR-PC party leader Horacio Cartes. In the final vote in the chamber of deputies on 17 March, 49 legislators voted in favour of the senate’s modified version.

Opposition lawmakers from the ANR-PC’s traditional rivals like the Partido Liberal Radical Auténtico (PLRA), as well as smaller left-wing parties like Frente Guasú, argued that the reform placed an unfair burden on workers. Outside the halls of Congress, the resistance was more vocal. Unions for teachers and judicial workers launched several nationwide strikes, claiming the government was confiscating their retirement security. The final version that passed was the senate version, which was slightly more flexible. Many unions eventually accepted this as the lesser evil, as it preserved certain benefits, such as the recognition of years of service for motherhood.

 Political cost

The economic gain comes at a political cost. The belt-tightening measures have strained the relationship between President Peña and the public sector. While his administration allocated more funds to social programmes like Zero Hunger in 2026, the perception remains among many workers that their earned rights are being eroded to pay for historical mismanagement.

Key points of pension reform

The newly enacted law introduces several structural changes designed to increase revenue and delay the outflow of funds:

● Higher contributions: It increases employee contributions to the fund from 16% to 19%, and state contributions from 5% to 10%. Teachers had demanded state contributions of 14%.

● Retirement age: The retirement age for teachers and magistrates is set at 53 years, with a minimum service of 25 years. Previously there was only a minimum time of service required to retire, but not a legal retirement age. The initial pension payment will start at 78% of the last salary and can reach 90% if the individual works until the age of 58. Meanwhile, the retirement age for police and military personnel is set at 55 years, with 25 years of service. The pension payment can reach 90% at age 60 and a minimum 30-year contribution. Previously military personnel often retired with less than 30 years of service; 70% retired under the age of 55.

● Maternity Benefit: In a nod to social equity, the law allows female teachers to count one year of service per child (up to two children) toward their retirement eligibility.

● Stricter Calculations: Following the trend set in 2025 by the Instituto de Previsión Social (IPS), the private sector social security institute, the calculation for pension amounts will gradually shift to reflect a longer average of career earnings rather than just the final few years, preventing ‘salary spiking’ just before retirement.