Pension populism threatens Andean economies

Manuel Merino lasted less than six days as interim president of Peru. Appointed by congress after legislators impeached his well-liked predecessor Martín Vizcarra, Mr Merino’s chaotic term in office ended in ignominy after a police crackdown on demonstrators that cost two lives and forced his resignation. 

The human cost of Mr Merino’s short and inglorious tenure was unacceptable but his presidency will also be remembered for an act with serious economic consequences: one of Mr Merino’s final deeds was to sign into law a bill allowing Peruvians to withdraw pension savings early, the second time this year that legislators have passed such a measure. 

Peruvians deserve help from their government. The Andean nation has the world’s second-highest coronavirus death toll per capita and is suffering one of the worst recessions among emerging markets, after a lengthy national lockdown crippled the economy but failed to prevent a surge in infections.

Allowing citizens to withdraw part of their pension savings early is not the answer. Peru has more than quadrupled its gross domestic product this century and one of the quiet success stories underlying its strong and stable economy has been the private pension system. This allows citizens to build up retirement savings in individual accounts run by professional administrators. The system was modelled on that of neighbouring Chile, which pioneered a private pension system in the 1980s; Colombia and Mexico use variants of the same model.

As well as relieving long-term pressure on state finances and giving citizens more control over their financial future, private pensions systems have been instrumental in building large pools of local capital that governments can tap via bond issues. The state-run systems in Brazil and Argentina stand as testament to the hazards of relying mainly on the government to fund pension benefits; both countries have suffered repeated fiscal crises partly caused by unaffordable pension promises. 

The private pension models used in the Andes can and should be improved. In countries with high levels of labour informality, such as Peru, many workers drift in and out of formal employment and are unable to build up adequate savings, or any savings at all. Even for those with long salaried careers, contribution levels are not high enough. Peru’s government safety net for the impoverished elderly is inadequate. A small number of pension fund administrators dominate the market in Peru and Colombia. 

None of these problems will be solved by allowing early withdrawals of savings. Peru’s legislators have listened to their populist hearts rather than their financial heads in allowing citizens to raid their pension pots for a second time this year. The first withdrawal led to around $4bn being pulled from the system, which had about $43bn of assets under management; the cost of the second could be similar.

Peru’s pension populism echoes similar moves across the border in Chile, where congress is in the final stages of approving a second raid on pension savings. The pension fund industry points out that repeated withdrawals threaten to unravel the entire system — an explicit goal of some on the political left who have never cared for private pensions and are now pushing for legislation to enshrine a dominant role for the state.

Carefully targeted reforms, rather than a slow death, is what Latin America’s private pension systems deserve. Bribing citizens with their own money is not the answer.

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