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FIAP > Destacados Boletines > Chile: According to the director of the UC Institute of Economics, the pension reform should offer strong incentives for labor formalization and incorporate a stronger individually funded component, because more savings are needed
17 August, 2023

Chile: According to the director of the UC Institute of Economics, the pension reform should offer strong incentives for labor formalization and incorporate a stronger individually funded component, because more savings are needed

“Pension reform is very necessary, and not only because of pensions, but also because people need to see that the country is progressing. Fair enough, the 40-hour project was approved, since there was some consensus. It was a good measure, but it is merely a line on the bingo card. Pension reform is the complete bingo card. I think there is a lot at stake here. Even more than in the tax agreement”

That is one of the messages delivered by the director of the UC Institute of Economics, Tomás Rau, regarding the pension reform that the government submitted to Congress last year. He believes that “all positions will have to give way,” and hopes that eventually the reform will lead to a stronger individually funded component, because he says that “we must save more, to revitalize the capital market.”

What do you think of the pension reform submitted by the government and being discussed in Congress?

It is a much-needed reform. We have been trying to approve a bill of law for more than a decade. However, this bill of law has many difficulties. It seems to me that, given the state of affairs, it is not politically and economically feasible in its present form, Despite the fact that the idea of raising contributions by six points is almost a consensus, because it was included in a bill of law of former President Piñera II, and also of former President Bachelet II, although in that case it was a little less, only five points. But there is no consensus on the assignment of those six points. The current bill of law allocates it entirely to a social fund, which basically entails introducing more PAYGO elements. Many technicians and the opposition think that the 6% should be allocated, in different proportions, more to the individually funded system and less to the PAYGO system.

And what do you think?

I am one of those who think that it is very important to increase savings, and this bill of law does not appear to do so. Those six points will be used for paying insurance, for paying pensions. The capital market was severely damaged by the withdrawals. Accumulated funds accounted for about 80% of GDP, but dropped to 56% last year. There is probably a lot left to recover, and if we do not increase savings, increasing pensions will be more complicated. So, I think that little should be attributed to the PAYGO system, since the Universal Guaranteed Pension (PGU) has already been approved, significantly increasing replacement rates for low-income individuals.

So you think a larger part should go to the individually funded system, but not necessarily all of it?

Not necessarily all of it, because it will depend on actuarial calculations. The technicians have to agree on that, because this reform has to be technically and politically viable, with a certain degree of legitimacy. There are certain set ideas among citizens, such as increasing some benefits, and the fact that women have always been more negatively affected by the gender gap in wages, contribution gaps due to maternity, and childcare. There are certain elements that are firmly installed, that people are willing to pay as a social benefit, even from their own contributions. And that is reflected in a very interesting joint study by the Catholic University and Cadem on preferences regarding pension systems, which asked people about a series of combinations of pension systems, and people were decidedly willing to allocate one or up to two points of their contributions for social benefits for women and more vulnerable senior citizens.

Apart from the assignment of the additional contribution, is there anything else that worries you about the bill of law?

I am very worried about the labor issue. Increasing contributions by six points is a tax on work. One can argue, depending on whether workers receive part of that money, that it may actually cause less distortion, but in the end the cost of the payroll for the employer will go up. So, it is a tax on work, and it is not just a little bit, it is six points. We also have high informality rates of 27.4%, which are not the highest we have had historically. If you add 8.5% of unemployment to that, you have about a third of the workforce that is not contributing today. Perhaps someone from the informal sector is contributing through receipts on purchases, but they are the least. So, if you have a third of the workers who are not contributing, how are you going to design a pension reform that collects? A pension reform of this magnitude, which is very necessary, has to assign strong incentives to formalization. It has to be pro-employment and pro-growth. That is something I miss in this bill of law.

And what can be done to encourage formalization, for example?

There are incentive and penalty measures. Increasing oversight is a penalty measure. There are many employees who are supervised, at least that is what they say when asked by the INE survey, but who do not receive a contribution payment. So, there must be oversight; you have to have very clear laws, because this is a new system, a reform that will depend on people paying more. I am also one of those who think that you have to include some benefits with social assistance, the more you contribute, even if you have a poor salary, but you contributed nonetheless, you can opt for greater social benefits. I know that this tends to break the principle of universality that may be behind this bill of law. And this sounds almost obvious, but formalization and formal ventures must be encouraged. There are many ventures that not only do not pay taxes, but do not pay anything. There are some programs, but more can be done. And education is needed, of course.

To increase the contributor base, do you think that the pension reform should be accompanied by a reform of the labor market?

We definitely have to increase formalization. Pension reform bills of law may not be necessary. But they have to at least be discussed in parallel. With a third of workers not contributing, it is unlikely that a pension reform will be able to increase savings. And it is not circumstantial, it is a bit structural. In what way? Informality, this 27.4%, is a little lower than it was before the pandemic. It’ has always been around 28% or 30%. So we have to deal with it.

Source: https://www.latercera.com/


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