Coronavirus Has Exposed Latin American Pension Systems’ Fragility

RIO DE JANEIRO, BRAZIL – Pension funds are attracting more attention than ever in Latin America, amid a pandemic that is impacting overall economic capacity.

According to the International Labour Organization (ILO), the pandemic has driven 41 million people in the region into unemployment, thus impacting pensions’ average premium system or the individual account system.

In the average premium system, contributions are paid into a fund managed by the Government in which, after a certain number of years, a pension will be paid according to the average salary earned.

In the individual account system, contributions are deposited which accumulate monthly and increase with the yield of low or high-risk portfolios.

The lack of contributions due to unemployment impacts the average premium system the most. These deficits are reflected in the final pension balance, but will also affect the state fund available in the future.

Informality: a core issue

Informality also has an impact on the pension system, as contributions are stopped and a gap is created in the pension base.

“To have as much as 70 percent of the population in an informal situation is unsustainable. We will need to make reforms, so that the whole pension system is more of a voluntary savings system, but not as it is today,” said Maria Mercedes Cuellar, former Finance Minister of Colombia.

However, informality is not only linked to the inability to make contributions due to unemployment.

“Many formal workers fail to respect their contributory obligations. They make agreements (between employers and employees) not to pay into the pension system,” said Roberto Carlos Salinas, former superintendent of pensions in Honduras.

According to the World Bank, 58 percent of Honduran workers are casual, but that percentage could be as high as 80 percent because of lack of contributory fidelity, Salinas said.

Pensions as a lifeline

In Chile, an initiative was approved on July 23rd for workers to withdraw ten percent of their savings in private funds.

“It’s an initiative that makes sense and I don’t think it’s something that signals the end of the world,” said former World Bank chief economist for the Americas and the Caribbean Sebastian Edwards.

“Many people, especially conservatives and right-wingers in Chile, thought that this was going to be a terrible crisis, and I don’t think so, which is something understandable, rational, ten percent is ten percent,” Edwards said.

By August 12th, 77 percent of the system’s 11 million contributors had requested to withdraw their funds, and more than 3.6 million had received nearly US$5 billion (R$25 billion), according to Chile’s Pension Superintendency.

However, Edwards believes this measure will increase social inequality.

“The funds saved have not paid income tax. That tax is deferred until the time it is used once the person retires, and by allowing withdrawal without paying taxes, those income taxes that had been deferred are abolished. We are providing wealthy people with a tax break worth US$2,000,” he added.

Withdrawals of up to US$3,700 in Peru

After a law was passed on April 30th, the six million contributors in Peru were allowed to withdraw up to 25 percent of their accumulated funds, with a maximum of US$3,700 per person.

The measure was extended until July 18th and, according to the Pension Fund Administrators’ Association (AAFP), US$6.783 billion were withdrawn.

“Clearly this measure has been a cushion against this pandemic. While US$3.7 billion was excessive in relation to the Peruvian economy in my opinion, I think it was an appropriate measure,” said Enrique Castellanos, a Professor at the University of the Pacific in Lima.

In the Dominican Republic, a restitution of 30 percent of contributions to the Pension Fund Administrators was proposed, but this was lowered to 20 percent.

“The problem is that the amount of resources accumulated by Dominican workers at the individual level is not much. We are speaking of workers with a salary of about US$300 a month, which is not much to accumulate,” said Dominican economist Magdalena Lizardo, executive director of the Pareto Consulting Group.

In Colombia, Decree 558 dated April 15th temporarily decreased mandatory employer contributions from 16 to 3 percent during April and May, but was overturned by the Constitutional Court on July 23rd. Some companies made such deductions from employee contributions.

“What the court said now is that (those companies) must contribute this money within a period of up to 18 months. We don’t know how that is going to be ruled. These contributions will have to be reinstated,” said Santiago Montenegro, president of Asofondos.

Argentina’s pension crossroads

Since the abolition of Pension Fund Administrators in 2008, pensions have once again become the responsibility of the Argentine state, a pension fund that has served as a minor source of state and semi-public expenditure.

“Argentina has retired with no contributions made for more than four million people. These non-contributory pensions produce a deficit of three points of GDP and the government is trying to correct this by “liquefying” the retirement for all beneficiaries,” said analyst Salvador Di Stefano.

Since 2018, Argentina has been experiencing a severe recession and the pension system will be severely strained by the impact of the pandemic.

“There are no savings, we don’t have a pension fund. Basically today the ratio is 10,500,000 people contributing against 9,500,000 pensioners. The deficit is now impossible to overcome,” Di Stefano concluded.

A “tsunami” for Brazilian funds

In March, private funds in Brazil accumulated a deficit of US$9.766 billion, but in April it was reduced to US$8.741 billion.

In May, losses dropped to US$6.546 billion, according to the Brazilian Pension Funds Authority (PREVIC).

Given this scenario, former CEO of Goldman Sachs in Brazil, Paulo Leme, said during the recent Expert 2020 conference that “if you draw an analogy with a tsunami, the water has already flowed in through our windows, and there are winners and losers”.

The 369 regulated funds in Brazil manage assets of about US$84.123 million, according to the Brazilian Association of Closed Pension Funds (ABRAPP).

Source: EFE