Chilean President Sebastián Piñera this month signed legislation to allow savers to tap an additional 10 percent from their pension funds, the second withdrawal approved this year amid the economic turmoil brought on by the Covid-19 pandemic. Piñera’s government has been vocal about its disagreement with pension withdrawals, but it introduced the bill in order to counter the opposition’s own proposal. What are the merits and downsides of the latest legislation, along with its long-term effects on the pension system? What political dynamics are at play, and can the Piñera administration consider this a win? What does the new law mean for citizens and businesses?
Carolina Goic Boroevic, senator and former presidential candidate in Chile: “The first thing to note is that we now have a second withdrawal due to the inability of President Piñera’s government to provide an effective and timely response to the needs of the people who have been affected by the pandemic. Nobody considers the second withdrawal a good measure because the relief is being financed with the workers’ pensions savings. But there are no other options. This is not a triumph for anyone, and less so for the government, which presented the proposal at the last minute only to cover up its political defeat in the Chamber of Deputies, with votes from its own coalition. Moreover, all this occurs amid a substantive discussion about the pension system, in which, as part of the opposition, we presented a good proposal months ago. The government has not yet commented on it.”
Kathleen C. Barclay, former president of the American Chamber of Commerce in Chile: “The withdrawal of a second 10 percent of private pension savings will provide an immediate boost to the economy, estimated at 1 percent of GDP due to increases in private consumption. The impact is expected to be less than with the first withdrawal as, first, many have already exhausted their savings and, second, individuals remaining in the system tend to belong to higher-income groups less likely to spend on consumption. One important downside of the legislation is that roughly four million of the 11 million contributors will no longer have savings in the private system. Two groups are particularly affected: 1.) 18 percent of those over the age of 50, who will have no remaining pension balance and a limited time horizon to restore their savings and 2.) younger people who will have eliminated or reduced savings at an early age, making the need to increase future savings greater to obtain adequate pensions. This measure is short-term consumption driven and will have a negative impact on longer-term investment, making it harder to return to the medium-term growth trajectory needed to face the increased social demands. From a political standpoint, the second 10 percent withdrawal was less negative than the first due to the Piñera government’s initiative to collect taxes on withdrawals by higher-income individuals. While an improvement from legislation presented by the opposition, it reflects the failure of Chile’s political class for well over a decade to address the underlying need to reform the pension system. The Piñera government has filed a case with the Constitutional Court to prevent further withdrawals initiated by the legislature. The outcome of the case is pending.”
Guillermo Holzmann, professor at the University of Valparaíso and CEO of Analytyka Consulting: “From a political analysis standpoint, the second withdrawal of 10 percent of workers’ pension funds has several important nuances to consider. The first is that this ‘help’ to cope with the socioeconomic impact of Covid-19 comes from each worker’s individual savings; it does not come from the state. The second is that its approval means installing a de facto parliamentarism within a hyper-presidential system, breaking traditions and bringing forth constitutionality issues that the government is trying to resolve through the Constitutional Court. Third is that the debate has transformed into an ideological breakdown regarding the future of the system and its financing, considering that after this second withdrawal more than four million workers will be left without savings for their future pensions. Fourth is that the economic effect has been positive to the extent that it allows the injection of liquidity into the market, favoring commercial activity. Fifth is that it means taking $34 billion out of the stock and financial system, with an impact of 2.8 percent of GDP, according to the central bank. Sixth is that the withdrawal favors groups that already have savings in the system, but it leaves out a growing percentage of those in the informal economy. And seventh is that, for the government, it implies a loss of leadership ability, despite wanting to regain political space in the Constitutional Court. The conclusion, in strategic terms, is that citizens will demand replacement of individual savings and a transformation of the pension system, which will translate into a requirement of the constituent process that is to begin in April of next year.”