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
46 Pages Posted: 20 Sep 2020 Last revised: 1 Sep 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 data, this study quantifies the effects of a 10% early release of pension funds. Each withdrawn dollar brings a loss of 1.61 dollars in future retirement savings, reducing estimated monthly life annuity benefits by 7.27%. This policy raises income inadequacy and inequality in retirement; it would take 4.37% 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. 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: Suggested Citation