The Chilean Opposition Seeks to Tap Pensions to Offset Economic Crisis

(Stratfor)

The Chilean parliament is considering reforms to rules governing the country's pension system that would defuse social and political tension in the short term but incur various economic and political costs in the long term. Chile's Chamber of Deputies will vote July 15 on a provision that would permit payees into the system to withdraw 10 percent of their accumulated funds; the Senate would also have to approve the measure for it to become law. Opposition parties have endorsed the proposal as a means of ameliorating the deepening economic crisis provoked by the COVID-19 pandemic.

Chilean President Sebastian Pinera, who called July 14 for a national agreement on deeper structural reforms to the pension system, opposes the current proposal.
As an alternative to the pension withdrawal proposal, on July 14 the Chilean government announced an expansion to the country's pandemic stimulus package including a one-time $650 check for families, loans of up to $2,500 on favorable terms and an extension of measures partially freezing mortgage payments.
The business sector, which strongly opposes the proposed pension withdrawal, supports the Pinera government's approach.
Some opposition groups agreed that while deep structural reform to the pension system is called for and should be pursued during the drafting of a new constitution (assuming voters in an October referendum approve the drafting of a new constitution), the 10 percent pension withdrawal measure also needs to happen.

To investors, passage could signal that the Pinera government might be unable to counteract a trend toward populism that threatens Chile's long-standing status as a pro-market haven.

Economists have cautioned that approval of the 10 percent withdrawal proposal could derail necessary structural pension reform and damage Chile's international reputation as a regional economic bright spot.

To investors, passage could signal that the Pinera government might be unable to counteract a trend toward populism that threatens Chile's long-standing status as a pro-market haven for private investment.
This could have reverberations throughout Latin America, where Chile has been the standard-bearer of pension systems based on individual accounts.