January 20, 2022 6:01 pm

The Chilean example: Saving pays in times of crisis

Chile is facing one of the worst political crises since the infamous and bloody coup of 1973 with negative consequences for its economy. The distance between the interests of the political leadership and the demands of the new emerging middle class, born of the highest economic growth in GDP per capita in Latin America over the last three decades, reached its climax with the outbreak of October 2019, when the Cacerolazos and violent overflows were felt in all the neighborhoods of Santiago, from the most vulnerable to the wealthiest areas such as Providencia and Las Condes.

The nascent middle class is clamoring for greater free access to public university education and a better public health system, whose low-quality supply has recently been aggravated by the saturation of demand due to massive immigration, attracted by the economic boom and the weakness of the controls.

The erosion of the traditional political parties of the left and right, heirs to the return to democracy, had been simmering, ignited by resounding cases of corruption and a profound electoral abstention in a country with an optional vote.

Corruption cases splashed and eroded the credibility of its main leaders Bachelet, Piñera, Ominami and even the Armed Forces.

The last two presidents: Bachelet and Piñera were elected with the abstention of more than 50% of the electoral roll, as well as the conventional elections for the new Constitution, while the current president Gabriel Boric was elected with 45% abstention electoral.

Chile faced the pandemic crisis with an evident political weakness inherited from the outbreak of October 2019, which, however, maintained the constitutional order, facing a significant depreciation of its currency, capital outflows, withdrawals from pension funds and higher public spending on assistance to households and companies due to the pandemic, without the macroeconomy getting out of control (growth and annual inflation forecast 2021: 12% and 7% annual respectively).

One of the economic strengths that allowed Chilean households to face the costs of the pandemic has been precisely the withdrawals from pension funds. The recent monetary policy report from the Central Bank of Chile indicates that AFP withdrawals were US$55 billion, an impressive 22.1% of GDP. Most of them were used for consumption expenses, secondly, debt cancellation, and lastly, for savings in other institutions.

The figures are impressive due to the accumulation of pension savings of Chilean households. Indeed, the stock of Chilean pension savings managed by the AFPs reached the equivalent of 82% of that country’s GDP during 2020 and 63% at present.

However, Argentines could not withdraw funds from their savings to retire because they do not directly have or have it. No one withdraws or uses what they do not have.

Indeed, from the nationalization of the AFJP to the present, the pension savings of Argentines are under state administration. According to the latest report from the Sustainable Guarantee Fund, today they represent US$47.8 billion, approximately 10% of Argentine GDP at the official exchange rate.

But not only is its magnitude small, in addition to not having it available for health emergencies as in the Chilean case, but most of it is “invested” in “defaulted” public debt: 72.4%, much of it quasi-par 2047 indexed public bonds to inflation that have been selectively defaulted by not recognizing the true inflation December 2007-2015 by the last two administrations, as well as another 2.5% in loans to insolvent provinces constantly refinanced.

Meanwhile, in Chile, according to the latest report from the Superintendency of Pensions, the percentage of investment in public debt by pension funds is only 16.2%, diversifying the idiosyncratic risk by investing 55% in assets of the outside.

Today, the pension savings of generations of Argentines is equal to zero: defaulted and liquefied by the inoperative state administration of those funds. Argentine pensions are paid with monetary issue, since they do not reach the contributions and contributions to social security due to impoverishment, fiscal dwarfism and informality of Argentine work.

The outbreak of October 2019 and the pandemic caused a significant decapitalization of the Chilean economy. However, the stocks of public savings (copper fund) that financed the cost of assistance to households and companies, made it possible to cushion the impact. Savings and fiscal austerity during times of fat cows pays off during crises.


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