Effects of COVID-19 Early Release of Pension Funds: The Case of Chile

Journal of Risk and Insurance - Manuscript ID JRI-Nov-20-215.R1, 2021

41 Pages Posted: 20 Sep 2020 Last revised: 25 May 2021

See all articles by Miguel Lorca

Miguel Lorca

University of New South Wales (UNSW) - School of Economics

Date Written: September 18, 2020

Abstract

Amid the extraordinary economic effects of COVID-19, some policymakers have turned to retirement savings accounts to support individuals in financial hardship. Given the haste, the long-term impacts and their distribution across the population have scarcely been analysed. Using Monte Carlo simulations on the Chilean Social Protection Survey linked with administrative pension data, this study quantifies the effects of a 10% early release of pension funds. Considering the stipulated minimum and maximum amounts, this policy results in an average withdrawal of 22.91% from individual accounts. Each USD 1 withdrawn brings a loss of USD 1.59 in future retirement savings, reducing estimated monthly life annuity benefits by 7.26%. This policy raises income inadequacy and inequality in retirement: it would take 4.40% higher government expenditure to counteract these effects for retirees aged 65. Given the resulting increased pressure on welfare systems, we explore several alternatives to mitigate these effects and address the current challenges of most defined contribution pension schemes. Enforcing worker pension contributions and eliminating the related tax evasion show the biggest impacts. Providing incentives to delay retirement by at least one year or increasing contributions combined with an intra-generational solidarity component has a slightly lower effect.

Keywords: Retirement savings, pension adequacy, fiscal sustainability

JEL Classification: G23, H55, J32

Suggested Citation

Lorca, Miguel, Effects of COVID-19 Early Release of Pension Funds: The Case of Chile (September 18, 2020). Journal of Risk and Insurance - Manuscript ID JRI-Nov-20-215.R1, 2021, Available at SSRN: https://ssrn.com/abstract=3694889 or http://dx.doi.org/10.2139/ssrn.3694889

Miguel Lorca (Contact Author)

University of New South Wales (UNSW) - School of Economics ( email )

High Street
Sydney, New South Wales
Australia

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