Effects of COVID-19 early release of pension funds: The case of Chile
By Miguel Lorca
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 analyzed. 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 Each withdrawn dollar brings losses of 1.59 dollars in future retirement savings, reducing monthly pension benefits by 7.26%.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 intragenerational solidarity component shows the biggest impacts. Contribution enforcement, reducing tax evasion, and delaying retirement by at least 1 year via incentives have lower but significant effects.
Source: Online Library
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