As COVID-19 struck, governments across Latin America and the Caribbean imposed lockdowns and other restrictions that led to widespread job losses. There was record unemployment in the hospitality, tourism, and retail sectors. Youth, women, and low-income workers suffered especially, and jobs in the informal sector took a hard hit. The increase in remote work that emerged during the pandemic has resulted in a growing mismatch in skills between those people who are plugged into the digital economy and those who are not, with the latter unable to access new jobs that emerged during the crisis. And in many countries, there has not been a full recovery to pre-pandemic labor participation rates.
A New In-Depth Study
Most of the losses in labor markets—with the exception of these lower participation rates—have now disappeared. Nonetheless, as we show in a new report, the COVID-19 crisis has put additional stress on pension systems in the region, which have long been characterized by low coverage and insufficient income for pensioners. While many of the labor market effects were temporary, the impact of policies implemented during the crisis was not. Several governments offered early withdrawals in capitalization systems, and many people took them. The results are dire: For example, in Peru, the average individual is projected to have lost 40% of their pension pot, with an even greater impact on low-income and older affiliates who are least able to rebuild their savings. In Chile, total pension assets plunged from 82% to 60% of GDP, slashing expected retirement wealth by up to 60% for the poorest affiliates.
The fact that many countries have legislation supporting minimum pensions also makes for a dangerous fiscal cocktail. Many more individuals contributing to capitalization systems are projected to get pensions below the minimum, requiring substantial future support from fiscal accounts.
The widespread losses in expected pension wealth, combined with large expansions in the size and scope of non-contributory pensions, put millions of future pensioners at risk and exacerbate issues of fiscal sustainability for area governments. Governments must correct for those dangers. They must embark on long-term structural reforms, an issue plumbed in a recently published book on the impact of the pandemic on pension systems in four countries—Argentina, Chile, El Salvador, and Peru—with policy recommendations for the region as a whole.
Different Pandemic Effects on Different Pension Systems
The effects of the pandemic, of course, have not been equal when it comes to the different kinds of pension systems. Broadly speaking, beneficiaries of pay-as-you-go pension systems, which are paid for by contributions from active workers, may experience smaller impacts, as their benefits are locked in once they are acquired. Nonetheless, many people lost their jobs during the pandemic. They were unable to complete the required number of contributions to receive their benefits and will have to delay their retirements. Moreover, many pension funds are not fully funded. They require government transfers, which will be more difficult to provide given that governments emerged from the COVID-19 crisis highly indebted and unable to fully close their overall deficits. As a result, future benefits for people enrolled in pay-as-you-go schemes may be in danger in the years ahead.
People holding individual account plans, in which pensioners receive a retirement payout based on their lifetime contributions and the investment returns on them, face a different kind of risk. Pension balances, particularly for those nearing the end of their careers, have been subject to substantial volatility. Initially, the value of financial assets held by pension funds decreased dramatically during the pandemic. They then rose with the lowering of interest rates, only to fall again with higher inflation and the higher interest rates to combat it, leading to a rollercoaster for pension funds and for the benefits of those close to retirement.
For younger workers, the reduced frequency of contributions and lower rates of future pension coverage also create risks. These are limited by the recovery of labor markets in 2022. However, these younger workers will face the consequences of the early withdrawals discussed above, and it is not clear that governments will be there to help if they retire with insufficient funds.
The Nature of Reform
All these immediate and longer-term effects of the pandemic, combined with the traditional challenges of low pension coverage, low retirement incomes, and fiscal sustainability issues, require structural reforms with an integrated vision which goes beyond partial and short-run solutions. That includes initiatives to encourage more labor formality and greater protections mechanisms. And it will require fiscal reforms, like additional spending to improve pension systems and the introduction of additional tax collection for the financing of contributory and non-contributory pension systems.
It also demands measures to get ahead of the effects of early withdrawals from pension plans, like the significant reductions in expected pension wealth, in the coverage rate, and in adequacy of retirement incomes, especially for low-income people.
Our book, based on a common framework for analysis of the impact of COVID-19 in the region developed by the IDB, delves into these challenges in their economic and political dimensions and advocates for specific solutions for specific countries and for the region as a whole. In the interest of individual citizens and the economic health of the region’s economies, there is no delaying comprehensive reform to tackle serious pension problems now.
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