President Sebastian Piñera aims to bring his elder brother's private pension system into the 21st century
The upcoming overhaul of Chile’s private-led pension system points to business as usual. President Sebastian Piñera—the younger brother of José Piñera who molded today’s system as minister of work and social security under Augusto Pinochet’s military dictatorship—unveiled a bill last October, which raises mandatory contributions from 10.0% to 14.2%, bolsters competition among private administrators (AFPs) and increases the government’s financial support for low pensions. The reform—widely approved by the opposition—modernizes the current scheme and should not have any noticeable effects over economic activity in the near-term, according to surveyed panelists.
Notably, the hike in mandatory contributions by workers is to be fully-implemented over the next decade and will be financed solely by employers. It is thus possible that the added labor costs could weigh on the labor market and soften employment, a viewpoint supported by Gabriel Cestau, senior economist Santander, who noted: “We believe this change [in mandatory contributions] should impact negatively on [private] consumption at the margin.” Nonetheless, Cestau emphasized that Santander’s forecasts project that “economic growth will off-set this effect”; our Consensus Forecasts see economic activity expanding 3.3% this year and 3.1% in 2020.
Investment, on the other hand, should benefit from additional savings, generated by the increase in mandatory contributions. On this point, Cestau added: “We estimate financial investment will be boosted by the additional contribution rate and we expect that to be positive for capital markets (fixed income and stocks).”
The fiscal effect of gradually raising the government’s contribution should also be buffered in the short-run, as Piñera’s program has already factored in the added costs of the reform during his mandate (2018–2021). However, when fully-implemented in 2028, the scheme is projected to cost around 1.3% of GDP annually, according to a study led by Felipe Guzman, senior economist at Creditcorp. The details on how the long-term fiscal pressure will be offset remain to be seen, however. Expanding upon this point, Alejandro Fernández, chief economist at Gemines, remarked:
“This is probably one of the most sensitive aspects of the proposed reform. There is no increase in the sources of tax revenues to finance the increase in pension spending. The proposal [..] is that the resources generated by growth will make it possible to finance this higher expenditure without affecting the balance of fiscal accounts. I think the most prudent thing would be to add higher taxes or lower exemptions from some time in the future.”
Lastly, the pension reform intends to infuse more competition into the system as a way of reducing administrative fees, which have remained broadly stable for years. First, the bill introduces a reduction of reserve requirements for AFPs, from 1.0% to 0.5%, in an attempt to lower the entry barrier for new players. Secondly, a broader arrange of financial institutions will be allowed to handle the additional funds, raised by the 4.0% hike in contributions. Despite the adjustments, some of our surveyed panelists doubt that the reform will have a significant effect on competition. Expanding on this, Cestau noted: “It will be much easier to set up a new AFP, but much more could be done to increase competitiveness.”
All told, the overhaul validates the market approach of Chile’s pension system and ratchets up its size. Raising individual contributions is a step in the right direction considering the country’s track record in economic development. Life expectancy has grown solidly since the start of the century and is projected to continue increasing over the next decade; meanwhile, contributions have remained below the OECD average. Against this backdrop, pressure is mounting on President Piñera to accelerate the passing of the bill through Congress. Given it represents one of his main electoral pledges, Piñera’s ability to successful tweak his elder brother’s pension system will have a significant bearing on how favorably history books assess his time as Chile’s president.
5-year economic forecasts on 30+ economic indicators for 127 countries & 30 commodities.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: March 18, 2019
TagsBrexit Precious Metals Commodities Turkey Energy Commodities Central America UK Nigeria IMF Economic Debt TPS Eurozone Inflation Australia European Union Exports Draghi Canada Italy Latin America CIS Countries Ukraine United States interview Nordic Economies Greece Trade Investment Costa Rica; GDP; Budget Infographic Base Metals Commodities GDP Israel economic growth Mexico Base Metals Agricultural Commodities Africa Oil Asian Financial Crisis Forex election China Colombia Venezuela Copper Spain Lagarde Budget deficit Canadian Economy Palladium Healthcare Company News Gold Commodities Cannabis France Consensus Forecast Tunisia MENA Germany Housing Market Cryptocurrency Exchange Rate South Africa Economists Bitcoin precious metals Vietnam G7 Asean scotiabank OPEC chile Emerging Markets Eastern Europe Japan Banking Sector Resource Curse Asia Brazil Iran TPP Major Economies Russia USA Unemployment rate Portugal United Kingdom Economic Crisis Sub-Saharan Africa Argentina Euro Area Economic Growth (GDP) oil prices India public debt Political Risk
To examine the implications of the Chilean constitutional convention election, and the outlook for Chile’s economy… https://t.co/voBtK9VrjS
22 hours ago
The Peruvian sol has endured considerable volatility since the end of March as investor sentiment towards the Peruv… https://t.co/qpec1mOC7f
1 day ago
Congratulations to; Citi, Capital Economics, Societe Generale, Prometeia, ABN AMRO Bank N.V., DZ BANK AG, & Axesor… https://t.co/TvVJQ2wSJs
2 days ago
Improving global demand conditions seemed to rekindle the commodity price rally in May, with 32 out of the 34 commo… https://t.co/wFY4YGpIZC
3 days ago
Congratulations to; PT Bank Danamon Indonesia, Tbk., Nomura, Bank of Ayudhya Public Co Ltd & Oxford Economics for b… https://t.co/08gGuqSd20
6 days ago