Rodrigo Valdés School of Government Catholic University of Chile · 2019-04-25 · Perspective #1...
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Rodrigo ValdésSchool of Government
Catholic University of Chile
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Perspective #1
2Source: SBIF, SP and SVS.
Financial assets(as percentage of GDP)
0
40
80
120
160
200
240
1990 2000 2005 2010 2016
Investment funds Mutual funds
Insurance companies Pension funds
Bank loans to private sector
Financial assets, selected countries*(2013, as percentage of GDP)
0 60 120 180 240 300 360 420
Peru
Mexico
Colombia
Brazil
Chile
Australia
Sweden
UnitedStates
* Includes pension fund assets, mutual fund assets, insurance companies assets and bank loans to private sector.Source: Financial Markey Indicators, Word Bank.
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0
1
2
3
4
5
1960-1980 1981-2011
Initial growth Pension reform Unexplained
Perspective #1 (cont’d)
Source: Corbo and Schmidt-Hebbel (2003)
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Perspective #2
Forecast, as of 2000, by the Industry Association:
Source: El Mercurio
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Perspective #3
Median replacement rate for actual retirees 2007-2014 (with respect to their last wage):
• Self-financed: 20%• Total (with government top up): 40%
July 2017 average photo of private managers (AFP) affiliates:• Contributors wage = $ 1,143• Self-financed pension = $ 329• Total pension = $ 354
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Perspective #4
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Agenda
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1980 Reform – the system core
• Objective: consumption smoothing
• Defined contribution = 10% (employee)
• Individual retirement accounts
• Managed by privately-managed for-profit regulated-institutions
• Transition from old PAYG still ongoing
• Private annuity market or regulated withdrawal during retirement (65 men, 60 women)
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2001 Improvements
• Voluntary pillar with tax-deferral benefits
• Objective: complement mandatory savings
• Limited use given tax rates
• People to choose between 5 funds
• Objective: increase risk-return possibilities
• ≈50% go with the default path
• A few try to time the market
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2008 Reform – Solidarity pillar
• General taxes-funded “universal” top-up
• Objective: alleviate poverty
• Means-test access to poorest 60%
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45°
Self-financed
Totalpension
MinimumPension($160)
$470
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Agenda
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0 to 3 4 to 17 18 to 29 30 to 44 45 to 59 60 +
2006 39,6 38,5 24,5 29,2 22,5 22,8
2009 37,2 34,4 23,4 25,0 20,5 16,5
2011 34,4 32,5 19,9 22,3 16,8 13,7
2013 23,2 21,6 13,3 13,7 11,2 8,4
2015 19,5 17,8 11,0 11,3 9,0 6,6
Source: MDS, Encuesta Casen 1996-2015.
Population in poverty
Solidarity pillar has been quite effective
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-71%˜-50%
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Median replacement rate*
Self-financed TotalG
ende
r Women 12% 29%
Men 33% 52%
Total 20% 40%
Qui
ntile
1 14% 110%
2 10% 55%
3 18% 41%
4 26% 35%
5 26% 27%
Total 20% 40%
Source: Superintendencia de Pensiones.(*) With respect to last wage.
Larger gaps: women and middle class
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Contributing years are critical, solidarity pillar concentrates in low density
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0
10
20
30
40
50
0-1 1-5 6-10 11-15 16-20 21-25 26-30 30+
Years contributing
Self-financed
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Median Mean
Women 45% 48%
Men 64% 58%
Total 54% 52%
Note: Based on new reterees between 2007 and 2014.Source: Superintendencia de Pensiones.
Contributing densities are a significant problem (watch for incentives)
Contributing periods / periods since affiliation
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Self-employed barely participate
16Source: Superintendencia de Pensiones.
Contributors / Workers by type
0
0.2
0.4
0.6
0.8
1
Salaried
Self-employed
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17Source: CELADE, Revisión 2015.
Expected Additional Years at 65
As everywhere…A longer expected life
11.713.613.2
16.117.6
20.919.5
22.721.824.6
0
5
10
15
20
25
30
1950-1951 1980-1981 2015-2016 2030-2031 2050-2051
Men Women
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Source: Superintendencia de Pensiones.
Annual Real Return, Intermediate Portfolio (%)
As everywhere…Lower rates of return
18
-20
-15
-10
-5
0
5
10
15
20
25
30
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
80´: 12,3% 90´: 10,4%00´: 6,3% 10´: 4,0%
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Source: Superintendencia de Pensiones.
AFP Return on Equity (%)
Excess profits?
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-5%
0%
5%
10%
15%
20%
25%
30%
35%
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Need to increase the contribution rate… a no brainer
20Source: Pensions at a Glance, 2015, REO, FMI 2017.
Worker Employer Total
Chile 11,2 1,4 12,6
OECD 6,7 10,9 17,6
LATAM 7,1 7,1 14,2
Mandatory contribution rate (% of wages)
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Agenda
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Key principles
• Improve DC pensions.
• Increase savings for retirement.
• Introduce degrees of solidarity and risk-sharing in the DC system (income, gender).
• Maintain the CD system funding separated from the solidarity pillar’s.
• Insure sustainability and preserve incentives.
• Improve the system social /political acceptance.
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Key economic and political restrictions
• Very limited fiscal money.
• Pensions should increase now.
• Current private system should not receive more money, nor reduce its importance.
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Source: Ministerio de Hacienda.
Highly Independent
PublicBoard
Personal Accounts3%
2%
New Colective Savings System
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New 5% employer contribution
Women’s top-up
Intergenerational transfers
Intragenerational savings
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Source: Ministerio de Hacienda.
Highly Independent
PublicBoard
Personal Accounts3%
2%
New Colective Savings System
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New 5% employer contribution
Women’s top-up
Intergenerational transfers
Intragenerational savings
Incentive to delay retirement(compensate longer expected life)
Top-up to Increase of self-financed pension in at least 20%
Annual redistribution among contributors (per capita)
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Use of new 5% contribution (with initial transition)
26Fuente: Dirección de Presupuestos.
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
5%
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
2061
2064
2067
2070
2073
2076
2079
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Effect in pension, men, median income, different retirement years
27
0%
10%
20%
30%
40%
50%
60%
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
2061
2064
2067
Ahorro Personal Intergeneracional Estado Estacionario
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Effect in pension, women, median income, different retirement years
28
0%
10%
20%
30%
40%
50%
60%
70%
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
2052
2055
2058
2061
2064
2067
Ahorro Personal Intergeneracional
Bono Mujer Mediana Estado Estacionario
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Agenda
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Other proposals
• From the center-right opposition• Increase the employer contribution by 4% and save it in the
current AFP system
• Increase the solidarity pillar (especially for the eldest)
• From the left opposition • Move to a PAYG system
• AFP system with lower contributions, maintaining private property over current savings
• From center-left presidential candidates• Small tweaks to the government proposal
• Increase the solidarity pillar
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Agenda
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Final remarks, some questions
• Is politically sustainable a system with mandatory individual savings and a tax-funded minimum safety net only?
• Probably not. Need more risk-sharing, including for the middle class.
• Government action is not seen as part of the pension system.
• Is politically sustainable a system where only private, for-profit, entities manage pension savings?
• Perhaps, but watch out to become too much “Wall Street” and too little “Social Security”.
• Excess profits and excess power are problematic.
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Final remarks, some questions
• Critical to differentiate consumption smoothing from poverty alleviation objectives:
• Proportional benefits (rather than focused, progressive) are counterintuitive and unlikely to be funded out of taxes.
• When contribution densities are a key problem, watch out for wrong incentives.
• Likely outcome? • Unclear at this stage. We will probably see compromises
• We will see more reforms. Pensions systems have to adapt.
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Rodrigo ValdésSchool of Government
Catholic University of Chile