FIAP > Boletín – Recientes > PENSION NOTES – No.51 Withdrawal of pension funds: Defeating the Purpose of the Pension Systems. A review of the effects of this public policy
18 February, 2021
PENSION NOTES – No.51 Withdrawal of pension funds: Defeating the Purpose of the Pension Systems. A review of the effects of this public policy
Faced with the negative income shock caused by the pandemic, which was felt more strongly by informal workers, support measures have ranged from direct transfers by the State, easing of unemployment insurance, granting of soft loans and employment protection programs, among others. An important fact to mention is that only three countries in the world allowed the withdrawal of savings from the mandatory pension funds: Australia, Chile and Peru.
The non-means tested withdrawal of old age savings funds is an inappropriate public policy, since it can be used to advantage by those workers who have had more stable careers and have contributed regularly, and does not benefit those workers who have not been able to contribute to their individual savings accounts for different reasons (such as, for example, long periods in the informal sector), and even though they contributed at some point, their savings amounts are very low. Likewise, failure to impose requirements for the early withdrawal of mandatory savings generates massive pension savings withdrawals, exacerbating the problem of low pensions and fiscal expenditure.
In Chile, withdrawals have resulted in average reductions of 23% in 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 Peru, 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.
Early withdrawals should be a last resort measure, and if authorized, their design should include means-testing, tax neutrality and mechanisms for replenishing funds, so as not to cause a significant drop in pension amounts.
