The law approved in a plenary session of the Congress of Peru, which allows members of the country’s AFPs who retired at 65 to withdraw 95.5% of their saved funds (the difference will only be left for covering health), came into effect on Friday, April 22, 2016. The law had been passed last year, but the Executive, making use of its faculties, alleged that the bill of law was unconstitutional and infringed the terms of international treaties ratified by the Peruvian state, due to which it blocked its promulgation and returned it to Congress. Last week, however, the initiative was ratified by an overwhelming majority.

Allowing the withdrawal of social security savings, without any safeguards, undermines the very foundations of a pension system. One must bear in mind that the assumption is that people are not particularly far-sighted, and this is precisely why there is mandatory saving throughout working life in most countries in the world, in order to avoid the State – and ultimately the community – from having to take care of individuals in old age due to their excessive squandering.

The same principle applied during working life is also applied in retirement: there is no guarantee that people will act responsibly – not only during working life, but also in retirement. This is precisely why retirees are paid in monthly amounts. This is valid regardless of whether the pension system is individually funded, mixed or PAYGO: in all cases it is assumed that the benefits to be received must be gradual.

The measure approved in Peru begs the question as to what the country will do to finance the old age of individuals who, after withdrawing all their funds, lose them, either due to irresponsibility or fraud, and no longer have the means to finance their lives until their death.

It is true that some individuals could make responsible use of these savings, and also that others could obtain better returns than those the State can provide. But in general terms, this implies a very significant systemic risk.

The consequences of the above make it highly probable that the State will end up taking care of these individuals in some way, in order to avoid an old age in extreme poverty for those who misspent their savings. It is difficult to understand the underlying reasons for the decision of the Peruvian Congress, but it is easy to envision the dangerous precedent established for populist initiatives in other countries in the region.

“The State will most probably have to take care of those who have misspent their pension savings after withdrawing them from the AFP.”

Download press clipping here (only the Spanish versión)

Source: Editorial El Mercurio Newspaper
Date: 25.04.2016

The law approved in a plenary session of the Congress of Peru, which allows members of the country’s AFPs who retired at 65 to withdraw 95.5% of their saved funds (the difference will only be left for covering health), came into effect on Friday, April 22, 2016. The law had been passed last year, but the Executive, making use of its faculties, alleged that the bill of law was unconstitutional and infringed the terms of international treaties ratified by the Peruvian state, due to which it blocked its promulgation and returned it to Congress. Last week, however, the initiative was ratified by an overwhelming majority.

Allowing the withdrawal of social security savings, without any safeguards, undermines the very foundations of a pension system. One must bear in mind that the assumption is that people are not particularly far-sighted, and this is precisely why there is mandatory saving throughout working life in most countries in the world, in order to avoid the State – and ultimately the community – from having to take care of individuals in old age due to their excessive squandering.

The same principle applied during working life is also applied in retirement: there is no guarantee that people will act responsibly – not only during working life, but also in retirement. This is precisely why retirees are paid in monthly amounts. This is valid regardless of whether the pension system is individually funded, mixed or PAYGO: in all cases it is assumed that the benefits to be received must be gradual.

The measure approved in Peru begs the question as to what the country will do to finance the old age of individuals who, after withdrawing all their funds, lose them, either due to irresponsibility or fraud, and no longer have the means to finance their lives until their death.

It is true that some individuals could make responsible use of these savings, and also that others could obtain better returns than those the State can provide. But in general terms, this implies a very significant systemic risk.

The consequences of the above make it highly probable that the State will end up taking care of these individuals in some way, in order to avoid an old age in extreme poverty for those who misspent their savings. It is difficult to understand the underlying reasons for the decision of the Peruvian Congress, but it is easy to envision the dangerous precedent established for populist initiatives in other countries in the region.

“The State will most probably have to take care of those who have misspent their pension savings after withdrawing them from the AFP.”

Download press clipping here (only the Spanish versión)

Source: Editorial El Mercurio Newspaper
Date: 25.04.2016