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
41 Pages Posted: 20 Sep 2020 Last revised: 28 Apr 2021
Date Written: September 18, 2020
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 Each USD 1 withdrawn brings a 1.59 times higher loss in future retirement savings, reducing estimated monthly life annuity benefits by 7.26%.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: Suggested Citation