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7 July, 2020

Withdrawal of pension funds in the pandemic: a bad idea

A resolution of the Chamber of Deputies has now been added to the numerous bills of law that have been submitted for authorizing the withdrawal of part of the accumulated funds destined to financing old-age pensions. Its purpose is for the government to sponsor a legal reform to that end. Although there is widespread concern regarding the reality that many households in the country are suffering in terms of drops in income resulting from the mitigation measures adopted by the government to address the Covid pandemic, the suggested mechanisms for alleviating this drop in income will probably cause greater damage in the long run.


There has been a consensus in the country for several years now that savings should be increased, and with them the funds available for paying pensions. In fact, a bill that gradually increases contributions by six percentage points is currently in the legislative process. Thus, any measure that goes in the opposite direction, i.e., that reduces savings irrevocably, will translate into lower future pensions.


Therefore, the transitory drop in household incomes must be addressed with transitory measures that do not cause future damages. In this context, the recently approved Emergency Family Income provides more resources to households that cannot achieve an average income of $ 400,000 per four-member household. Depending on the extent of the program, its fiscal cost is estimated at up to US $ 2.2 billion. This is a benefit that will mostly support the households whose income depends mostly on informal jobs.


A proposed constitutional reform in the last few weeks aims to allow members to withdraw up to 10% of their Social Security funds in the event of a constitutional state of emergency due to catastrophe being decreed, with the obligation of reinstating them later. The law would establish a mechanism whereby members or the State must reimburse said funds, once the constitutional state of emergency due to catastrophe has ceased.


What are the implications? The withdrawal of 10% of the funds could translate into the withdrawal of US$ 20 billion. Assuming that the State will have to replace the funds, it would have to spend 10 times more for middle-class sectors than the most vulnerable families, due to this pandemic “This policy is clearly regressive, diverting the State’s focus from those who most need its support during this emergency to more affluent sectors which, on average, can access other sources of income, such as, for example, unemployment insurance,” says Bettina Horst, LyD Director of Public Policy.


The resolution approved yesterday by the Chamber of Deputies proposes allowing the withdrawal of 10% of the accumulated funds by people who access unemployment insurance, and 5% for those who cannot access it. At least this resolution acknowledges that there will be a drop in pensions resulting from lower accumulated savings. “But it is striking that the main argument given to promote this initiative is that unemployment insurance has not been enough,” says Horst, adding, “Consequently, instead of affecting future pensions, a reform of the recently approved employment protection law, as agreed between the government and most opposition parties a few weeks ago, must be implemented to increase the resources obtained from unemployment insurance.


Source: https://lyd.org/centro-de-prensa/noticias/2020/06/retiro-de-los-fondos-de-pensiones-en-la-pandemia-una-idea-equivocada/


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