Chilean Finance Minister: with the fifth withdrawal of the AFPs, people would be left without funds and only with inflation

The Chilean Minister of Finance, Mario Marcel, referred to the proposal for a fifth withdrawal of AFP pension funds in the southern country, warning that, if this measure is approved, people “they will no longer have funds and they will only have inflation”.

Minister Marcel went before the Constitution Commission of the Chamber of Deputies to underline the risks in the event of such a project becoming a reality, noting that there are those who argue that they want to withdraw because the cost of living is higher, but that It is explained precisely by the previous withdrawals.

“Today there is an argument for retirement because the cost of living is higher. But that cost-of-living increase comes from past retirements. In the next round, we are going to have even more inflation, they are going to want to withdraw funds again to deal with this situation, and we are going to have another round of inflation. In the end, what are we going to have? People are no longer going to have funds and they are only going to have inflation. That is the concern we have”, said the minister in statements collected by Third.

This is how the Minister of Finance, Mario Marcel, concluded his presentation before the deputies of the Constitution Commission in the framework of the processing of the so-called fifth withdrawal of the AFPs.

The head of the Treasury commented that the withdrawals have costs, first, he explained, that it undermines the savings of the workers to finance their pensions; it forces sudden and massive liquidations of assets, deteriorating the value of the funds and weakening the local capital market; it has a fiscal cost; pushes prices up, contributing to higher inflation; tightens monetary policy, forcing the Central Bank to raise the MPR; and deepens a vision of social security based on individual property.

“We have to recognize that today we have more inflation. We still have an overheated economy in the aggregate. Of course, there are sectors that are lagging behind, which is an issue we have been concerned about and a series of measures have been announced, but of course the economic scenario is radically different from what it was in the case of the first withdrawal“, he claimed.

As reported by La Tercera, Marcel commented that “At this time, a new withdrawal would have an effect on inflation close to 5%. In other words, if today we have 9.5% (of the IPC), we would be at 14.5%. This, without considering that in the coming months the Central Bank still estimates that inflation will rise somewhat more. It is very likely that we will reach 10%, but a withdrawal would add 5 percentage points more to that inflation”.

The Finance Minister explained how these 5 points are calculated. “They are calculated by seeing how the exchange rate behaved in the discussion prior to the fourth withdrawal. So, what we have seen is that in that period, as we mentioned before, the exchange rate jumped much more than it had in previous episodes (…) A new withdrawal today would have a smaller effect on demand than previous withdrawals, because it would be more concentrated in high-income sectors that consume a smaller proportion of their resources, but, on the other hand, the impact on the exchange rate would be greater”.

That is, Marcel explained that “instead of having an inflation that would begin to stabilize in May-June of this year, we would have an inflation that would continue to grow for four or five more months (…) The new withdrawals take away purchasing power, even from the funds that are previously removed. Higher inflation means that the money that many people have saved from previous withdrawals would have a lower purchasing power.”.

And in the face of those who say that the rise in inflation is explained by international issues, Marcel showed an estimate made by the Central Bank of how the increase in inflation breaks down between the fourth quarter of 2020 and the fourth quarter of 2021, a period in which rose about 3.6%. There he said that 1.9% is explained by increased demand. The exchange rate explains 0.9%. And the remaining 0.8% is explained by external issues and other residual factors.

This means that, “of the increase in inflation that occurred in the last year until the fourth quarter of 2021, practically half is explained by higher demand, close to one percentage point is explained by the depreciation of the peso, and external factors explain more or less 0.8%. In other words, if we had not had withdrawals and we had not had that increase in demand, if we apply these same proportions to the current inflation differential, that is, between the 3% of the Central Bank’s target and the 9.4% that we have today, we would have an inflation close to 5%. The same would have increased, because there are external factors, but the rest is explained by these other internal factors”.

Regarding the fiscal effect that this measure means, Marcel pointed out that in net, the fiscal cost would be US$ 1,000 million for once, “but the permanent effect, which is reflected in the treasury’s debt service, is much more important”.

Why? “Because if the withdrawals increase interest rates, then it becomes more expensive for the government to borrow. The government here in Chile is financed more or less by 75% in the local market. So, to the extent that withdrawals and the prospect that they will continue to be repeated in the future, increase interest rates, it means that the treasury is going to have to spend more on servicing its debt.Marcel said.

And he added that according to his estimation, that higher cost that would imply for the treasury to borrow as a result of the rate hike, would be “of US$ 2,500 million per year and in a stable manner over time. Here it is no longer the one-time effect, but rather a constant effect over time. This would be practically equivalent to the resources that would be needed to bring the Universal Guaranteed Pension to 250,000 pesos, which is the government’s goal.

On the other hand, Minister Marcel recalled that “today there has been a lot of discussion about whether or not withdrawals harm the AFPs”. Regarding this, the minister recalled that the AFPs, when a withdrawal occurs and the funds they manage from affiliates are reduced, release reserves, “and a 10% withdrawal releases reserve requirements for US$ 501 million, which is transferred to the profits of the AFPs, that is, the AFPs, due to the effects of the required reserve reduction, earn money with a withdrawal, they do not lose silver”.

Likewise, he mentioned that the profits of the AFFPs “they do not come from the profitability of pension funds, they come from social security contributions. Therefore, the income of the AFPs does not change with a withdrawal, as long as they continue to contribute”.

But he also stated that “there is an issue that we can call, which is more value-based, which is: to what extent does the issue of withdrawals tend to emphasize the concept of ownership of pension funds and, therefore, if this gives rise to a way of looking at the social security in which everything is reduced to the issue of property”.

That, assessed the minister, “It has allowed us to have advertising campaigns like the one we have all been seeing in recent months. All the last few months we have had AFP campaigns in which the importance of fund ownership is extolled (…) Campaigns, which I think do not need to be too creative, to think that they have some relationship with a future reform pension”.

So, Marcel concluded that “what happens with the reiteration of withdrawals is that the ownership of the funds, which is the foundation that many people have, who say I want my money (…) ends up transforming into a value that they try to impose on a new pension system, or about a reform that comes in the future”.