Raiding pensions

Pension withdrawals: a much needed economic boost or a fatal mistake?

Chile, Peru and Bolivia are showing some signs of economic recovery. In Chile, a successful vaccination rollout, high copper prices and government stimulus packages are the main drivers. In Peru, the Ministry of Economy raised GDP growth expectations from 10% to 10.5% while Bolivia’s GDP grew by 8.7% in the first semester of 2021. 

While the outlook may be improving despite the pandemic, each of these countries are allowing citizens to withdraw money from their pension funds. The Chilean Parliament recently gave the green light to hold a controversial parliamentary debate on a law which would allow its citizens to withdraw 10% of their pension funds. In Bolivia, President Luis Arce approved a similar law with the aim of improving the economy of those households facing economic constraints. The measure will benefit 1.4 million people to whom President Arce recommended prudence. Furthermore, Peruvians took USD 8.4 billion from private pension funds after Congress approved withdrawal of 25% of pension funds.

“In the long term, no economist would tell you that this was a good idea,” explained a former director of the Central Bank of Bolivia (“BCB”), “but this situation was exceptional, suddenly millions of people in developing countries were left without income. And the governments too. It was not like the in the West, where the State came to the rescue and injected billions of dollars into the economy. We are not just talking about economies with a lot of poverty, like Bolivia or Paraguay, even relatively stable economies like Chile and Peru saw their income depleted.”

“But this situation was exceptional, suddenly millions of people in developing countries were left without income. And the governments too.”

Former director of the Central Bank of Bolivia

Loosening pension withdrawals can carry long-term risks of destroying people’s savings accumulated over decades. Critics also argue that such measures have the potential to create holes in the national systems which could have larger implications in the overall general pension system. Moreover, the lack of investment in health and in employment insurance in most Latin American countries could affect the poorer segments of the population in the future. 

But what other option did these countries have? An economist at the World Bank explained, “It’s not ideal, but in Chile and Peru it can be absorbed. Bolivia is a different story, it had to limit withdrawals to 15% which on average is USD 1,000, less than 2 months average income. The big problem is that it opens the door to more and more withdrawals and people use the money for spending, not for an investment. With more rounds of withdrawal the pension systems in Chile and Peru could be at risk, while in Bolivia even the financial systems would be put at risk.”

“It’s not ideal, but in Chile and Peru it can be absorbed. Bolivia is a different story.”

Economist, World Bank, Washington

To build confidence and foster resilience of their own economies, all three countries accepted an increase in Special Drawing Rights (“SDR”), an International Monetary Fund (“IMF”) reserve asset which addresses countries’ long-term needs for reserves. Chile currently has SDR 1.67 billion allocated, while Peru has SDR 1.28 billion and Bolivia SDR 230 million (SDR1 is currently valued at approx. USD 1.42).

The BCB director commented, “Starting in 2022, Bolivia will have to pay an extra USD 1 billion annually to service its debt on bonds issued in 2012. It’s ironic, when those bonds were issued the country didn’t really need them but now, just when the country is in its worst financial situation, they have to repay them. This explains why, despite a strong anti-imperialist rhetoric, Bolivia accepted the extra SDRs from the IMF.”

 

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