The effect of Covid pension withdrawals and the Universal Guaranteed Pension on the income of future retirees in Chile

Summary

Focus

During the Covid-19 pandemic, several countries allowed people to withdraw savings from their pension accounts. Chile experienced pension withdrawals of around 20% of gross domestic product, the largest amount among countries with these schemes. In 2022, the government significantly increased non-contributory pension benefits to support the low pension earnings of retirees. What share of the costs of pension withdrawals will be supported by retirees? What share will be covered by the government through larger transfers? And what are the implications of the withdrawals and benefits legislation for future fiscal costs?

Contribution

I present a model of the accumulation of pension wealth by workers in Chile. Pension contributions are accumulated every year from workers' permanent labour income. People have diverse probabilities of labour force participation, unemployment and formal employment. Different employment states and life cycle wage growth are estimated depending on gender, age, education, occupation and income-skill quintile. Simulating this model with micro data from the Chilean Household Budget Survey, I estimate the pension income and government transfers up to 2088.

Findings

The average loss in contributory pension income for current and future retirees would be 27.9% without accounting for government transfers. After accounting for these transfers, the average loss in total pension income for current and future retirees is just 6.2%. The government may end up covering 92% of the total value of pension withdrawals through increased transfers. These calculations do not account for possible changes to the pension system such as delaying the retirement age or increasing the personal contribution rate. These measures would decrease the costs of government transfers.

Abstract

Chile implemented large pension withdrawals during the Covid pandemic. Afterwards, Chile increased non-contributory benefits in a quasi-universal scheme. Simulating future pensions, I show that the average loss in contributory pension income is 27.9%, with losses of 23.9% and 31.4% for men and women, respectively. After accounting for public transfers, the average loss in total pension income is just 6.2%, with losses of 7.5% and 5.2% for men and women, respectively. Current retirees lost just 1.1% of their pension income after accounting for the government transfers. The state may end up covering 92% of the total value of the pension withdrawals through increased transfers.

JEL classification: D14, H55, O54

Keywords: pension wealth, Covid pandemic, fiscal costs