Pension Advisory Council warns that PGU "could produce disincentives to work formally in medium and low sectors"
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On Tuesday night, the Pension Advisory Council (CCP) sent the ministers of Finance, Mario Marcel, and of Labor and Social Security, Jeannette Jara, the report with their Opinion regarding the changes contemplated by the pension reform for the solidarity systemtoday consisting of the Universal Guaranteed Pension (PGU).

In the document, the group of experts, led by the former Minister of Labor, Alejandra Krauss, and made up of Paula Benavides, Cecilia Cifuentes, Carlos Díaz and Andras Uthoff, analyzed the financial and regulatory reports that accompanied the billto which they had access on November 8, after his entry into parliament.

In its 44 pages, some criticisms of the Dipres data regarding PGU beneficiaries stand out, and its discrepancy with the Government regarding the impacts of the proposed changes to the PGU on formal employment. “The PGU and its coverage could produce disincentives to work formally and to social security savings, particularly in medium and low income workers (…) We estimate that the effect caused by the increase in the PGU will have a greater impact on those active affiliates with lower salaries and with more possibilities of working informally, which allows them to evade or avoid pension contributions”, the report states.

“There is a real impact on the issue of women and I think it is a public policy that contributes to reducing inequalities, which is something absolutely necessary,” says Alejandra Krauss, president of the CCP.

According to the Council, “for these people the proposed measure would have a negative impact in terms of formal employment and pension savings”, although they also highlighted that the bill contemplates “contribution incentives for lower-income sectors through the system of social security, which could contribute to attenuate the previous effect”. With everything, conclude by suggesting that “new empirical studies be carried out for the Chilean case that allow more robust conclusions to be drawn from the effects of variations in the solidarity pillar and PGU on the labor market and pension savings”.

The president of the CCP, Alejandra Kraussexplained to DF that the vision of the Council responds to the fact that In Chile, informality has maintained a high and constant rate, around 30%, which is also higher in women. “This is a long-standing phenomenon, which cannot be attributed to the pandemic or to recent years. It is something persistent and therefore, necessarily, one has to be able to observe. Strengthening the PGU -which is an instrument which we all believe to be an advance in terms of social protection-, we have to see if this could actually have a negative impact and make informality structures more resilient. The studies are not conclusive, therefore we need to do more studies because what the country needs is more formality.”

Krauss also highlights the report, the gradual increase in pension recipients, and its impact on women. “There is a real impact on the issue of women and I think it is a public policy that contributes to reducing inequalities, which is something absolutely necessary.”

fiscal impacts

According to the Council, the beneficiaries of the extension of the PGU to 2024 would reach 2.5 million, that is, 88% of the population aged 65 and over. This implies 95,143 new beneficiaries, a number that will increase depending on demographics, exceeding 330,000 in 2030. The benefit will maintain its maximum coverage (96% of those over 65) between 2038 and 2065 and “then it begins to decrease because there is a higher percentage of older adults who are excluded for having a base pension greater than the superior pension”, they specified.

The impact on fiscal spending of the reform responds to the modification to the treatment of pensions of special laws; the increase in the PGU to $250,000 and the increase in coverage by modifying the targeting based on the total population; the associated increase in disability PBS; and the removal of test influx, the most significant being “the increase in the PGU, which, with the exception of the first two years, fluctuates between 70% and 83% of the highest public spending,” they said.

“In the first year since the law was enacted, the elimination of the exclusion of special laws represents 31% of the total, but it falls rapidly in the following years. In the rest of the analyzed period, the elimination of the test influx ranks second in terms of the impact on fiscal spending”.

Between 2030 and 2056 the spending generated by this reform shows a growing pattern and from 2062, “the spending of the reform would begin to fallwhich at first draws attention, due to the fact that the adult population over 65 years of age continues to grow,” the experts warned.

They also referred to the need to “strengthen” the capacities of the Undersecretariat of Social Welfare (on which the advisory body depends) “considering the scope of the actuarial analyzes that are required in the context of the reform and the level of fiscal commitments that are generated with it,” as stated in the text.

Criticism of the Dipres

The CCP also makes explicit some differences in the data provided by Dipres, such as the projected coverage that would reach 88% of the population aged 65 and over, estimated by the agency. As they indicated, this last figure differs” from the one presented in the financial report of the bill, “since, based on the consultations carried out, DIPRES made said correction since it originally included the effect of modifying the reference population for the test of influx, which will only come into force the second year,” they stated. “That is, there would be 95,143 additional beneficiaries,” as they explained, mainly due to the incorporation of pensioners by special laws, reparation and grace, who access the PGU at third month.

The council also suggests that “long-term projection scenarios be prepared and published in which real growth is contemplated for the parameters of the PGU, lower pension and higher pension, in line with real wages, including sensitivity analysis”. , in accordance with international practices.

They also observed “relevant differences” between the population aged 65 and over projected by DIPRES and the population estimates of the ECLAC population division in its 2022 revision. “DIPRES projections can be up to 10% higher thanwhich would imply for this factor a more conservative scenario from the fiscal point of view”.

In that framework, suggest “revising the population calibrations used in the model, so that they adjust as accurately as possible to the best available population information. In this way, the precision in the communication of expected beneficiaries and the impact of public policy would also be safeguarded.

Finally, they warn that “the trajectories analyzed reflect the limitations imposed for long-term analysis by anchoring the parameters in real terms while wages and pensions evolve with the real variables of the economy.”

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