A not so quick fix

Pension withdrawals in Chile: Short-term stimulus, long-term headache.

Since Covid started to take a grip of Chile in 2020, the administration has been preoccupied with the short to medium-term economic effects of the pandemic. In response, congress has passed successive legislative reforms to allow Chileans to make pension withdrawals and pump much-needed cash into circulation. Regionally the country is not alone in pursuing such a policy; Peruvians took out some USD 8.4 billion from their private pensions after Lima approved a 25% withdrawal of funds.

Whilst the withdrawal has functioned as a useful short-term stimulus – effectively acting as a bailout to compensate for pandemic’s most pernicious economic effects – dwindling pension pots could cause a longer-term headache. Indeed, in reference to Chile, the OECD pointed out that “Unless increased future savings compensate for these withdrawals, the consequence will be a low retirement,”.

A Chile-based economist specialising in pensions policy explained, “Since July 2020, congress has allowed four withdrawals, each allowing citizens to cash in 10% of their pension fund. Despite an improving economic outlook and the easing of pandemic-related restrictions, Chile is continuing to allow the withdrawals – the administration has clearly not given much thought to how they may be replenished.”

“Since July 2020, congress has allowed four withdrawals, each allowing citizens to cash in 10% of their pension fund.”

Economist, Chile

The totality of pension withdrawals is estimated to be in the region of USD 50 billion. Draining pension funds is rarely sound fiscal policy but unlike governments in Europe and North America, Chile along with the rest of Latin America was in no position to pump billions into the economy – the pandemic significantly squeezed the government’s fiscal position forcing it to consider more innovative approaches.

Chile fared better than most of its neighbours, notably Bolivia and Peru. A larger economy, lower unemployment in the formal economy and better access to international credit means that the administration will be able to better weather the volume of money taken out of the private pension funds (“AFPs”). Critically, Santiago will need to ensure its employment rate continues to tick upwards to cover the considerable number of withdrawals. The sheer size of Chile’s private pension funds – almost USD 205 billion – will also function as a buffer.

True, the withdrawals have meant that money flows immediately to where it is most needed, but AFP’s will be badly hit by further withdrawals. More worryingly, citizens will be reticent to have the drawbridge closed again. The incoming administration of president-elect Gabriel Boric will need to promote a compelling economic reason for doing so at a time when rising inflation is hitting household budgets, the withdrawals have made day-to-day living expenses easier to bear for those most hard-up.

The economist continued, “Chile is facing significant economic challenges in the medium to longer-term if the withdrawals continue. It could exacerbate high inflation and even put the financial system at risk, which is already going through many problems due to non-payment of credits and lack of resources. The withdrawals are also contributing to a weaker peso.”

“Chile is facing significant economic challenges in the medium to longer-term if the withdrawals continue.”

Economist, Chile

Too much money in the economy will compound Chile’s economic challenges, better now as the pandemic recedes to stop the policy, a difficult pill to swallow though that may be for pensioners flush with cash.

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