RIO DE JANEIRO, BRAZIL – The president of the Central Bank of Chile, Mario Marcel, warned Wednesday that early withdrawals from pension funds “currently represent the greatest threat to a solid and sustainable recovery from the economic crisis caused by Covid-19,” at a time when Congress is debating for the fourth time whether to authorize the measure.
In a speech before a committee of the Chamber of Deputies, the head of the Chilean Central Bank said that this policy of redemptions leads to “further overheating of the economy, higher inflation, and severe financial imbalances.”
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“These risks are no longer long-term but could be immediate, with powerful effects in 2022,” Marcel said, adding that the Central Bank “does not have the powers, instruments or resources to neutralize risks of this magnitude.”
On July 30, 2020, the Chilean Congress, against the government’s opinion but with the support of pro-government deputies, authorized for the first time that citizens could withdraw 10% of their pensions – managed by private mandatory contribution funds – to relieve their economy decimated by the covid-19 pandemic.
The measure, which was exceptional in nature, was subsequently approved two more times, in December 2020 and March 2021. Congress is currently considering several bills to implement the fourth withdrawal of 10% of funds and even 100% of savings.
On this option to withdraw the entire funds, Marcel said that the impact is difficult to quantify, “given the magnitude of the imbalance in financial markets that this could cause, with serious consequences for the country.”
The top official of the Central Bank said that the three 10 percent withdrawals approved have led to a “structural change in the country’s economy” that consists of a “systematic weakening of the long-term capital market in national currency.”
This market, Marcel said, is “fundamental to the financing of the Treasury, mortgage lending and investment in infrastructure.”
The authority stressed that consolidating this structural change would entail higher costs and shorter financing terms, greater dependence on foreign capital, higher exchange rate risk, and greater risks to financial stability, affecting the state, companies, and citizens in general.
Marcel recalled that the Central Bank’s predictions regarding previous withdrawal projects have come to pass, as evidenced by higher interest rates and inflation rates, regressive distributional effects, and increasing difficulties in mitigating their impact on financial markets.
He also pointed out that the tax exemption for withdrawals could exceed US$5 billion with a fourth withdrawal, benefiting the wealthiest 20% of the population.
“Combined with the inflationary impact on lower-income groups and the deterioration of pensions as funds are emptied, the sequence of withdrawals would become the most regressive public policy in many decades,” Marcel said.
“These economic effects, which were only a long-term risk with the first withdrawal, will be exacerbated by a fourth withdrawal and threaten to become even more severe,” he added.
Source: infobae