Chile's pensions 'fair game' for further crisis drawdowns

Now that savers can withdraw 10% from their pension pots, Chile has opened the door to further raids, say economists.

    Left-wing Chilean Congresswoman Pamela Jiles, who represents some of the capital Santiago's poorest suburbs, charged through the Congress chamber in a pink cape and feathered fans to celebrate the pension bill's approval at an early stage [File: Rodrigo Garrido/Reuters]
    Left-wing Chilean Congresswoman Pamela Jiles, who represents some of the capital Santiago's poorest suburbs, charged through the Congress chamber in a pink cape and feathered fans to celebrate the pension bill's approval at an early stage [File: Rodrigo Garrido/Reuters]

    Within minutes of Chilean lawmakers approving a bill that allows citizens to draw down 10 percent of their pensions to help make ends meet during the coronavirus pandemic, a phrase started trending on Twitter: "We're going for more."

    The bill's authors insisted the raid on the private retirement system introduced in the 1980s under the Augusto Pinochet dictatorship was just an emergency measure but as it snowballed in popularity, so have the ambitions of those backing it.

    Lawmakers who voted in favour of the bill last Thursday included 53 percent of centre-right President Sebastian Pinera`s ruling coalition, dramatising the tectonic shifts under way in a country that has long been a bulwark of free-market capitalism with aspects of its economy copied by neighbours from Peru to Brazil.

    While the potential withdrawal from the accounts was set at 10 percent, economists and analysts said the bill had awakened many to the idea that the funds really belong to their contributors.

    That could open the door for further raids on the accounts - until now jealously stewarded by their managers with strict access rules - in times of crisis, they said.

    The privatised pension system was held up as the crowning glory of the economic shock treatment stewarded by a group of policy advisors called the Chicago Boys for their time studying at the University of Chicago under United States-based free marketeer Milton Friedman.

    As the region now quakes under severe unemployment and reduced incomes under quarantine, the anti-free market gospel is proving just as contagious. Peru passed a law in April allowing citizens to withdraw up to 25 percent of their pensions early, and there are moves in Mexico and Brazil to allow similar drawdowns, even as some experts warn of the long-term consequences for cash-strapped governments.

    Chile pension reforms 2
    Chilean opposition congressman Leonardo Soto wears a face mask reading 'No More AFP (Pension Fund Administrators)' [File: Rodrigo Garrido/Reuters]

    'No way back'

    "The latent threat of further unrest adds to the political pressure while undermining the scope for more reasoned debate," said Nicholas Watson, of Teneo Intelligence, noting the influence of fierce and historic social protests in Chile last year over elitism and inequality even before the virus struck.

    Pamela Jiles, a left-wing deputy representing some of the capital Santiago's poorest suburbs who charged through the Congress chamber in a pink cape and feathered fans to celebrate the pension bill's approval at an earlier stage, said Chile's free-market system had reached a point of no return.

    "The people invaded Congress with a very specific and simple demand, but one that strikes at the heart of this discredited system," she said. "There is no way back now."

    Jiles said any longer-term financial worries could be addressed later.

    "What does long-term matter to me if I starve to death?" she asked. "That is not relevant today and I think the risks have been exaggerated. And if those terrifying prospects materialise, that's what the political class is for - to find solutions."

    The individual capitalisation Pension Funds Administrators (AFP) system promised payouts of up to 70 percent of final salary when it was introduced.

    Former US President George W Bush called it an example from which his country could "take some lessons".

    Yet while the AFPs provided a pot of money to fuel a domestic economic boom by bringing a reliable pile of cash into equity markets, Chile's large informal workforce and an intermittent or partial contributions history - particularly among women - coupled with high charges, meant that most payouts fall far short of pensioners' needs. In March this year, the average retiree received $289 a month.

    Crossing the rubicon

    Some economists said the remaining funds could be seen as fair game to make ends meet in future crises.

    "You are basically opening a door that will be very hard to close because this move is so popular," said Hermann Gonzalez, the head of macroeconomic policy at the Santiago-based Latin American Centre for Economic and Social Studies.

    "There's the risk that any future event, a natural disaster or another recession, will prompt a further use of these savings."

    Political scientist Cristobal Bellolio said the congressional upset meant crossing a symbolic Rubicon whereby the funds were obliged by law to hand over savings to anyone that asked for them, without penalties or tax.

    "Most people regardless of political position or social status just want to get back the money they have been saving for such a long time," he said.

    Among them is Maria Jose Manriquez Gonzalez, 32, who lost her job in the seaside city of Valparaiso in the pandemic and is struggling to support four children.

    "I would like to use that money to get away from where I live, which is basically a slum, to buy a home but right now I`m going to have to use that money for food," she said.

    SOURCE: Reuters news agency