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

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 Each withdrawn dollar brings losses of 1.59 dollars in future retirement savings, reducing monthly pension benefits by 7.26%.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