After years of mobilization, a growing impact on public debate and an important elab process a proposal to emerge from the current pension crisis, the National Coordinator of Workers NO+AFP (CNT NO+AFP) has heard for the first time a direct response from the Government.
The Undersecretariat for Social Welfare replicated some of the projections and figures in the proposal, which has proven to resist even in the most unfavourable economic scenarios. Let us remember that, in order to demonstrate its feasibility and financial sustainability, the initial proposal of the CNT NO+AFP (November 2016) saw pessimistic growth in the economy (or GDP), with 1% on an annual real average until 2100. Conservative assumptions were also used in terms of taxable pay and minimum wage, projected with an expansion of 1% real. The most challenging aspect, to stress the model and account for the feasibility of this initial proposal, was to work with an average real return of 2.5% per year. This aspect is important, CNT NO+AFP’s proposal is not a pure delivery system (PAYG), but a distribution system with a Technical Reserve Fund, i.e. with collective capitalization mechanisms.
With new information available in relation to the population projections updated to 2019, the rates of return projected by the Superintendency of Pensions and figures from the Undersecretariat indicating the disappearance of the non- by the middle of the 21st century, the update of the proposal to 2019 has made it possible to further strengthen the alternative of a real social security system, capable of paying sufficient pensions.
The Superintendency of Pensions defined (in mid-2018) three projected scenarios of profitability by 2039. An optimistic scenario that, considering Fund C, envisages an average real return of 5.28%; an intermediate scenario, which projects an average real return of 4.15% for the Fund itself; and a pessimistic scenario in which the Fund’s return would be 3.03%. It is essential to consider that the latter figure, considered as pessimistic by the Superintendency, is higher than the profitability projected in the initial proposal of 2016, around 2.5%.
Incorporating the scenarios raised by the Superintendency into the CNT NO+AFP proposal, its financial sustainability by paying pensions well above the current ones is reaffirmed. With a return of 5.28%, pension system reserves would exceed more than 134 times the expenditure spending by the year 2100. In the intervening scenario, with a return of 4.15%, by the end of the century the reserves would exceed by more than 38 times the expenditures. And in the pessimistic scenario, with a return of 3.03% would be 2.4 times the amount of reserves in the system. In the latter case, some kind of parametric adjustment would be required to reach the projected equilibrium curve. The balance of reserves would be achieved with a return of 3.52% per year.
Considering this data, it is surprising that the Under-Secretary of Pensions, María José Zaldívar, declares that those who defend the CNT NO+AFP proposal “still cannot answer what happens in the year 2101”. The truth is that a blunt response is delivered which, in an intermediate scenario, would allow reserves to be accumulated more than 38 times over the expenses. And this considering the effects of aging, which would lead the system to pay about 7 million pensions by the end of the 21st century.
What is not really entirely clear is that the current AFP system manages to survive by 2101 and that is the question that the authority still cannot answer. In principle, it has not been answered because the official figures themselves have not attempted to project the results of the system over the course of the century. Moreover, in its dictatorial origin, the AFP system did not contemplate any study or calculation to help solve the assertion that individual capitalization would be able to guarantee replacement rates of 70% or 100%, by the year 2020.
Half of the current pensions reach replacement rates of 20% or less (33% for men and 12% for women) and only with public government spending, through the Solidarity Pillar in its Solidarity Forecast Contribution (APS), the median replacement rate manages to reach u n 40% of the latest remuneration, according to data of the Superintendency of Pensions. This stark reality is also valid for those who have quoted all their lives. As of December 2018, half of those who paid between the ages of 30 and 35 received an old-age pension under $297,000 pesos.
But the current retirees’ situation is even worse. Half of the 125,000 people who retired in 2018 only managed to self-finance a pension of less than $48,000. And half of those who quoted between the ages of 30 and 35 could only self-finance a pension less than $246,000. Thus, half of those who have quoted virtually all their lives are unable to obtain a pension that exceeds the minimum wage.
The AFPs themselves have admitted this tremendous difficulty. According to a general manager of AFP Habitat in 2017, pensions of 2.5 million people will be less than the minimum wage, even when considering a real return of 4%, a 15% contribution and no pension gaps in working life. This is directly related to low profitability.
The results obtained by the current system have been met with an average real return of 7.91% per year between 1981 and July 2019. The drop of a point in profitability could mean 18% to 20% less pension. Let’s remember that, in an optimistic scenario, future real profitability will be 5.28%, i.e. it would stabilize at 2.6 percentage points less than the system’s historical profitability. This at best. In a more likely (intermediate) scenario, actual returns will be nearly 4 percentage points below the system’s historical profitability.
The most worrying conclusion of these figures is that even in an optimistic scenario the current system will pay, generation after generation, worse pensions than current ones. The mechanisms that recent governments have encountered to postpone this deep crisis are risky and have a ceiling defined by the swings of the national economy and financial markets. These mechanisms are the Solidarity Pillar and investment in higher risk-return financial instruments, such as alternative assets.
The Solidarity Pillar involves increasing public spending, not only for the non-contributory component of the system, but even for the private contributory component. The growing shortfall in pensions will increase the pressure on the fisco, which postpones the crisis by alleviating poverty, improving in some way the pensions that the AFP system is unable to guarantee. In turn, mechanisms such as investment in alternative assets (venture capital, purchase of domestic or foreign debt, infrastructure investment, concessions, etc.) increase the system’s exposure to the risks of the financial world. This in an increasingly complex international economic scenario.
These backgrounds realize that by the year 2101 it will be virtually impossible to continue a system like AFP. Moreover, looking at this structural background, it is very likely that the crisis in the system will unevenly unevenly take hold of 2050. The replacement of the AFP system is imminent and, as in other countries that have reversed the privatization of funds, such a change could come from both a left-wing and right-wing government. So far, the authorities have decided to postpone the crisis. However, it will probably be this generation that sees the end of AFPs and the installation of a system based on the principles of social security.
The content poured into this opinion column is the sole responsibility of its author, and does not necessarily reflect the editorial line or position of El Mostrador.
