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FIAP > Boletín – Recientes > Book Withdrawal of pension funds: Defeating the Purpose of the Pension Systems: A review of the effects of this public policy
18 February, 2021

Book Withdrawal of pension funds: Defeating the Purpose of the Pension Systems: A review of the effects of this public policy

The following study analyzes in depth the various impacts that the Covid-19 pandemic has had on employment, the number of contributors, and the collection of pension systems in Chile, Colombia, Mexico, Peru, the Dominican Republic and Uruguay, as well as the role that individually funded systems should play in the face of this type of catastrophe. It is also observed the high precariousness that affects informal employment, a category that was the most affected in every country in study. In this context, support measures have ranged from direct transfers by the State, flexibilities to unemployment insurance, delivery of loans and employment protection programs, among others. Meanwhile, only three countries in the world allowed savings to be withdrawn from mandatory pension funds: Australia, Chile and Peru.

In the two countries of the region, unlike Australia, extraordinary mechanisms were approved to face the economic effects of the pandemic, without there being evidence of an impact on the income of each affiliate. In the case of Chile, withdrawals show a dissaving charge to the Pension Funds of almost USD 34 billion (approximately 17% of the funds), with worrying effects, such as that 88% of affiliates up to 25 years of age who made withdrawals, were left with no balance in their accounts. In the case of Peru, withdrawals associated with the four current mechanisms total USD 14.4 billion, almost 40% of the funds that existed when the first withdrawal of funds was approved.

In the Chilean case, withdrawals have resulted in an average reduction of 23% of the accumulated balance in personal accounts, translating into a reduction of between 15% and 18% in future pensions for women, and between 10% and 13% for men. In the Peruvian case, estimates show a drop of up to 24.5% in accumulated balances in individual accounts, mainly affecting workers close to 40 years of age, who will not have enough time to restore their funds.

The study carried out by FIAP also shows that the design of withdrawals, in the cases of Chile and Peru, reveals a lack of targeting those who need it most, a tax incentive to make withdrawals and a lack of clarity regarding how said funds will be replenished.

The report concludes that early withdrawals should be a last resort resource and, if authorized, their design should include targeting, tax neutrality, and fund replacement mechanisms, so as not to generate a significant drop in the amount of pensions.

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