Chile’s great pension raid

LONDON – How should families pay for the costs of the pandemic? The conservative government’s finance minister proposes that the state should help. Thanks but no thanks, retort members of the country’s congress. Families can use their own accumulated pension savings, and the government should give them access to those funds.

Experts of all political stripes point out that the government is not heavily indebted and could afford to spend more. This country has had enough of experts, reply progressive parliamentarians. People want their money, and they want it now!

When the evil empire is finally forced to open the pension lockbox, the do-gooders’ leader sprints across the congressional hall in a magenta superhero cape. Her followers cheer.

The world turned upside down? A science-fiction tale in a galaxy far, far away? No, just a regular workday in Chile’s parliament.

Chile used to be the boring, sensible Latin American country. In neighboring Argentina, Diego Maradona was idolized for scoring a goal with the hand of God. Had he been Chilean, he would have been booed. But no more. With their recent antics, Chilean politicians of right and left have been giving Latin American demagogues a run for their money.

In Chile, pension savings are tax-free, so when high-income households withdraw their money before retirement age, they should pay tax, right? Wrong, say Chilean parliamentarians from across the political spectrum. When a courageous social democratic senator argued that tax was indeed due, thugs posted his home address on social media and encouraged other thugs to pay him a visit.

Why would anyone with a heart induce households to dip into their pension savings to put food on the table during the pandemic, when kinder, gentler alternatives are available? The standard answer from the Chilean opposition is that the government’s response to the crisis was too little, too late.

There is a kernel of truth here: President Sebastián Piñera’s administration was slow to come to terms with the gravity of the pandemic, and its initial aid packages were skimpy. But by October 2020, the International Monetary Fund was reporting that Chile had deployed around 8% of GDP for discretionary fiscal measures to fight the virus and its economic fallout – less than rich countries in Europe or North America, but far more than most Latin American peers. The government could and should have done more, but when it came to direct support to households, the Fund concludes, Chile has been the region’s second-biggest spender, after Brazil.

Besides, the claim that pension funds were the only option because the government refused to spend more was always disingenuous. The motley crew of rightists and leftists who assembled a super-majority to amend the Chilean constitution and force the government to release the pension savings could have used the same tactics to pressure the government to transfer more cash to families and small businesses.

The choice not to do so reflects a mixture of belief and desperation. The belief – widely shared by Chileans – is that the country’s pension system must change. While the system of individual retirement accounts managed by private fund administrators (known in Chile by the acronym AFP) has long been a favorite of pundits, it pays low pensions. But so would pretty much any other system, because Chileans save too little (10% of income, compared to 15% or more in many OECD countries and retire early relative to the country’s rising life expectancy (a Chilean woman who retires at 60 can expect to live until she is 90).

A reform that increased savings and provided more insurance for people affected by low wages, poor health, or prolonged unemployment would have been the reasonable response. But why negotiate for months to arrive at a deal that will leave everyone a bit unhappy (the very definition of a negotiation) if you can raid the coffers now and worry about the consequences later?

Chile’s Congress has just authorized a second withdrawal of funds, which will leave roughly half of pension savers – mostly poor workers with low and volatile incomes – with zero funds in their accounts. Who will pay for their future pensions? No one knows.

Proponents of the pension raid like to think they have dealt the AFPs a lethal blow. They have not. The industry’s fees are set not as a proportion of assets managed, but as a percentage of savers’ monthly paychecks. So, the AFPs will keep the same revenues but now will have lower costs, because assets under management will have fallen by nearly $40 billion.

After the first withdrawal of funds in August, one poll showed public trust in the AFPs had risen. Because savers are now sure the money is theirs (many previously doubted this), any future attempt to engage in redistribution across savers is sure to meet political resistance. It is hard to imagine progressives pursuing a more regressive policy.

Members of Congress are acting so obtusely because they are desperate. Never before in Chilean history have citizens thought so poorly of politicians. Another recent poll gave Congress a public approval rating of just 13%; the corresponding figure for the main political parties is just as low or lower. With Chile set to hold seven elections in 2021, politicians will do whatever it takes to court voters’ support.

But such an attitude can yield only short-sighted policies. Worse, bad policies are paying off politically: Pamela Jiles, the television-celebrity-turned-congresswoman who donned the super-hero cape, now enjoys the highest approval rating of any politician. One is tempted to exclaim, with the Star Wars character Padmé Amidala: “So this is how liberty dies…with thunderous applause.”

Of course, the feeding frenzy is not uniquely Chilean. The fashion for raiding pension coffers started in Peru. In Argentina, a Peronist government is again hell-bent on destabilizing the economy. In Brazil and Mexico, presidents spent months belittling scientists and arguing that COVID-19 was not worth worrying about.

Because the policies they produce are so ludicrous, populist cycles eventually crash against reality and come to an end. Still, US President Donald Trump received 74 million votes after grotesquely mishandling the pandemic (and much else). For many people – and too many Chileans – that end is not yet near. Until then, may the force be with us.

Andrés Velasco, a former presidential candidate and finance minister of Chile, is Dean of the School of Public Policy at the London School of Economics and Political Science.

Project Syndicate