• The Chairman of the Chilean Central Bank, Mario Marcel, explained the effects to the Ministry of Finance.
• Chile – Central Bank warns that if the additional 5% contribution goes to a PAYGO system, it would affect growth and employment and would not significantly improve future pensions He also said that it would entail an increase of public debt up to about 40% of GDP by 2050.

At the request of the Ministry of Finance, the Central Bank drew up a report that assesses the long-term macroeconomic impact that possible changes to the pension system could entail. This was presented yesterday by the Chairman of the agency, Mario Marcel, to the Minister of Finance, Rodrigo Valdés, and the Minister of Labor, Alejandra Krauss.

In August last year, it was agreed with the Ministry of Finance to assess the long-term effects of the three alternatives for the allocation of the additional 5% contribution announced by the government: either to individual accounts, to a savings mechanism with intergenerational redistribution, or to a PAYGO system.

The latter was most critically assessed by the Chairman of the Central Bank, who said that if this alternative were chosen, it would affect long-term growth and would have an impact on employment.

1. Individual funding. According to the Central Bank report, if the 5% additional contribution is destined to the individually funded accounts, it would increase national savings by 1.2%, and would have “moderate” effects on the labor market. It would also have a moderate impact of 1% on long-term GDP growth. With this mechanism – which is currently in place – pensions would increase by 42.2% on average in the long term, according to the Central Bank’s calculations.
2. Saving with intra-generational redistribution. Another alternative evaluated by the Central Bank in its report, is the possibility of savings and with intra-generational redistribution. This mechanism is a collective savings fund belonging to a specific generation, in which the contributions of each group (aged 20-24, for example) are paid into a common fund, which belongs only to that generation. This fund is invested in the capital market and is distributed with a progressive criterion on retirement. “It is essential to incorporate incentives for formal employment and precisely define the ownership rights on the generational funds” says Mario Marcel’s presentation.

According to the report, if this mechanism considers an incentive to formalization, national savings would increase by 1.2%; similarly, if the 5% increase were allocated to the individual accounts, it would have heterogeneous effects on the labor market (increase in formality among low income groups). The impact on long-term growth would also be similar if individual funding were chosen, increasing GDP by 1%. Pensions would also go up 42.2% in the long term.

Nonetheless, he warns that without any incentive to formalization, the increase in the level of savings would be 1.1%, but it would have negative impacts on the labor market, there would be a drop in formal employment and a lower impact on the GDP in the long term. Pensions would increase by 40%.

3. PAYGO system.Finally, the Central Bank analyzed the macroeconomic consequences of the 5% being destined to a distribution system. In this case, national saving would drop by 1.3% and it would impact all macroeconomic variables: employment would drop, informality would increase and the long-term GDP would diminish. He adds that it would entail a high risk of fiscal problems, generating an increase in the public debt of about 40% of GDP by 2050 (today it is 21.7%). He also highlights the fact that this is the system that would least increase pensions, increasing them by 19%. Finally, Marcel contends that in a PAYGO system “contributions would eventually have to be increased and/or the benefits for future generations reduced in order not to reduce pensions”.

Source: El Mercurio

Date: 27.01.2017

• The Chairman of the Chilean Central Bank, Mario Marcel, explained the effects to the Ministry of Finance.
• Chile – Central Bank warns that if the additional 5% contribution goes to a PAYGO system, it would affect growth and employment and would not significantly improve future pensions He also said that it would entail an increase of public debt up to about 40% of GDP by 2050.

At the request of the Ministry of Finance, the Central Bank drew up a report that assesses the long-term macroeconomic impact that possible changes to the pension system could entail. This was presented yesterday by the Chairman of the agency, Mario Marcel, to the Minister of Finance, Rodrigo Valdés, and the Minister of Labor, Alejandra Krauss.

In August last year, it was agreed with the Ministry of Finance to assess the long-term effects of the three alternatives for the allocation of the additional 5% contribution announced by the government: either to individual accounts, to a savings mechanism with intergenerational redistribution, or to a PAYGO system.

The latter was most critically assessed by the Chairman of the Central Bank, who said that if this alternative were chosen, it would affect long-term growth and would have an impact on employment.

1. Individual funding. According to the Central Bank report, if the 5% additional contribution is destined to the individually funded accounts, it would increase national savings by 1.2%, and would have “moderate” effects on the labor market. It would also have a moderate impact of 1% on long-term GDP growth. With this mechanism – which is currently in place – pensions would increase by 42.2% on average in the long term, according to the Central Bank’s calculations.
2. Saving with intra-generational redistribution. Another alternative evaluated by the Central Bank in its report, is the possibility of savings and with intra-generational redistribution. This mechanism is a collective savings fund belonging to a specific generation, in which the contributions of each group (aged 20-24, for example) are paid into a common fund, which belongs only to that generation. This fund is invested in the capital market and is distributed with a progressive criterion on retirement. “It is essential to incorporate incentives for formal employment and precisely define the ownership rights on the generational funds” says Mario Marcel’s presentation.

According to the report, if this mechanism considers an incentive to formalization, national savings would increase by 1.2%; similarly, if the 5% increase were allocated to the individual accounts, it would have heterogeneous effects on the labor market (increase in formality among low income groups). The impact on long-term growth would also be similar if individual funding were chosen, increasing GDP by 1%. Pensions would also go up 42.2% in the long term.

Nonetheless, he warns that without any incentive to formalization, the increase in the level of savings would be 1.1%, but it would have negative impacts on the labor market, there would be a drop in formal employment and a lower impact on the GDP in the long term. Pensions would increase by 40%.

3. PAYGO system.Finally, the Central Bank analyzed the macroeconomic consequences of the 5% being destined to a distribution system. In this case, national saving would drop by 1.3% and it would impact all macroeconomic variables: employment would drop, informality would increase and the long-term GDP would diminish. He adds that it would entail a high risk of fiscal problems, generating an increase in the public debt of about 40% of GDP by 2050 (today it is 21.7%). He also highlights the fact that this is the system that would least increase pensions, increasing them by 19%. Finally, Marcel contends that in a PAYGO system “contributions would eventually have to be increased and/or the benefits for future generations reduced in order not to reduce pensions”.

Source: El Mercurio

Date: 27.01.2017