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

Journal of Risk and Insurance - Manuscript ID JRI-Nov-20-215.R2, 2021

42 Pages Posted: 20 Sep 2020 Last revised: 23 Sep 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 accounts to support individuals in financial hardship. Given the haste, the long-term impacts and their heterogeneity have scarcely been analysed. Using Monte Carlo simulations on the Chilean Social Protection Survey linked with administrative data, this study quantifies the effects of a 10% early release of pension funds. Each withdrawn dollar brings losses of 1.59 dollars in future retirement savings, reducing monthly pension benefits by 7.26%. This policy raises income inadequacy and inequality in retirement, increasing government expenditure by 4.33% to counteract these effects for 65-year-old retirees. We propose four policies to mitigate these effects and address the current challenges of most defined contribution pension schemes. Increasing contributions combined with an intra-generational solidarity component shows the biggest impacts. Contribution enforcement, reducing tax evasion, and delaying retirement by at least one year via incentives have lower but significant effects.

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.R2, 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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