IMF criticizes Covid pension withdrawals in Chile and Peru: “They mainly favor higher-income households”

RIO DE JANEIRO, BRAZIL – Early withdrawals from pension funds are not only an issue in Chile and Peru, where Congress is passing a fourth law to access savings in individual accounts of AFPs but also the corridors of international organizations.

One of them is the International Monetary Fund (IMF), which in its update of the Economic Scenario for Latin America, published this afternoon, has dedicated a special box to the analysis of the process in Chile and Peru, two of the countries of the continent that have allowed their citizens to access their retirement savings to face the economic crisis resulting from the pandemic.

Read also: Check out our coverage on Chile and Peru

In the annex to the report, the international lender notes that while the withdrawals in both countries “supported private consumption” and the impact on financial markets was “cushioned” by the “rapid response” of central banks, the measures did not target the population most affected by the loss of income.

“(The withdrawals) primarily favored higher-income households and are likely to undermine the ability of both systems to generate adequate pensions in the future,” the agency warned.

The Washington-based agency’s report said early access to pension funds “compensates” for income declines and “boosts” local consumption but “is not a targeted tool to support low-income and informal households.”

“In Peru, the withdrawals provided financial relief to households (which was greater than direct cash transfers), and in Chile, they more than offset the pandemic-related income decline for people of all income quintiles,” the IMF added, noting that this was evidenced by the rise in deposits in the financial system, which increased by more than 50% on average in both countries in the months following the bailouts, compared with an average increase of 12% between January 2011 and December 2019.

“However, the measure did not necessarily benefit those most in need. In Peru, which has a higher degree of informality, it reached mainly formal workers. In Chile, the mass of withdrawals accumulated in households in the top quintile of the income distribution,” the analysis said.

The Fund recalled that in July and December 2020, as well as in April this year, the Chilean Congress approved draft laws that allow savers to withdraw up to 10% of their accumulated funds, with different caps. Peru, for its part, gave the green light to similar measures in April, May, and November last year and in March this year, but with specific amounts and different eligibility criteria.

Thus, in Chile, 10 million people have made withdrawals under the first legislation, to which another 8 million were added under the second project and 7 million under the last withdrawal, with amounts equivalent to US$50 billion, or 20% of gross domestic product (GDP), representing 25% of pension fund assets in June 2020. In the neighboring country, 2.8 million contributors withdrew money under the first law, 3.7 million under the second, and another 2 million under the third.

The role of monetary authorities and the implications for the system going forward

The paper acknowledges that the potential negative impact of the withdrawals on financial markets was “mitigated” by the “rapid and comprehensive” response of issuing institutions in both countries.

“After initial turbulence in the first months of the pandemic, financial markets in both Chile and Peru recovered and recouped initial losses. The rapid recovery of financial markets is partly due to the decisive actions taken by the central banks of Chile and Peru,” the text states.

It should be noted that Chile’s central bank has come under pressure in the debate over a fourth savings bailout, warning of the measure’s impact on inflation and overheating of the economy, as well as the financial damage to insurance companies from the proposed early payment of pensions for retirees.

As for the impact on future pensions, the IMF stressed that the underfunding of the system is equivalent to a three percentage point drop in replacement rates.

“The impact of pension withdrawals could lead to explicit and implicit fiscal costs. For Chile, Evans and Pienknagura (2021) estimate that a withdrawal would entail a net fiscal cost of 3 to 6 GDP points due to the higher cost of the publicly funded solidarity pillar of the pension system,” the Fund concluded.