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Sixth retirement of pension funds: scope and challenges of a new process

This week the processing for a sixth withdrawal of the forecast funds began. In detail, there are seven projects that are being discussed in the Chamber of Deputies, a situation that has generated a great debate about the repercussions that it could have on the economy. In this context, the economist and academic from the University of Tarapacá, Mónica Navarrete, explained that “a new withdrawal from freely available pension funds means greater liquidity in the system, which has its immediate effect on the price of food.”

As a result of the current context regarding a possible new withdrawal of pension funds, Mónica Navarrete, academic and researcher at the Faculty of Administration and Economics of the University of Tarapacá, referred to the possible effects that this measure would have for the economy. national.

whatWhat effects would the approval of a sixth withdrawal from pension funds cause for the country’s economy?

The effect depends on whether the withdrawals go through the money market or not. This is the discussion that took place in the failed proposal for a limited withdrawal that the Government presented last time.

Again on this occasion, a technical discussion on whether a possible new ethiro could be limited to certain conditions or would be freely available (like the previous ones) is very pertinent and necessary, on the amount being discussed, whether it is a fixed amount or a percentage of the withdrawals, as have been the previous ones.

How could an increase in liquidity in the asset market affect households?

From economic theory there are several reasons to argue that this is not a good time for a new injection of liquid and freely available money into the economy.
From the economic prediction, a return in the short and medium term to the inflation rates of 3 to 4% that we had until 2019 is not observed, therefore, the decision to approve a new withdrawal will again be of a political nature and with macroeconomic effects difficult to reverse. And it is that a new withdrawal from freely available pension funds means greater liquidity in the system, which has its immediate effect on the price of goods and services and particularly food.

Economic theory indicates that the price structure of an open economy depends (mostly) on the behavior and expectations of macroeconomic variables.
At the microeconomic level; households have inflation expectations that are read based on the price of consumer goods and, today, clearly the reading is a higher cost of living, with a reduction in real wages, unemployment that does not subside from 8% with significant gender connotations.

Among the economic reasons for this scenario, we have seen global food prices rise at a faster pace due to supply chain restrictions imposed during the pandemic and the reliance on imported raw materials. This last factor is decisive for a small and open economy like Chile’s.

The war between Germany and Ukraine affected the supply chain in various sectors, including agriculture. The commercialization of wheat worldwide suffered alterations that caused an increase in the price of this input; situation that became adverse for Chile.

The Chilean economy has gone from a stable behavior of general inflation with values ​​within the target range of the Central Bank (4%) during the period from 2014 to 2019.

In this period, there were no motivations for households to worry about the effect of inflation on their family baskets. However, this changed abruptly in October 2019, when accumulated inflation stood at an average of 7.5%.

In the following months, the withdrawal of 25% of the total pension funds equivalent to 18% of Chile’s GDP in 2021; it entered the market as liquid money, reactivating the household economy during the pandemic.

In this scenario, increases in gross disposable income were reported, whose approximate monthly spending represented 1% of GDP in 2021.

Following the pension withdrawals, the consumption of durable and non-durable goods showed a more than proportional recovery of 17.2% and 22.6%, respectively.

The injection of money into the market was manifested through the purchase of vehicles, home improvement and debt payment in the different regions of the country. Retail trade led by supermarkets registered considerable growth in the second half of 2021, which then implied upward pressure on sales prices.

All these factors combined so that the food market in Chile in July of last year showed inflation close to 20% in food prices, a situation that had not been experienced in the last three decades.

Delving into the above, inflationary processes in Chile are also linked to high levels of concentration in the food market, therefore, it is probable that the behavior of individuals (families) before a new retirement causes high liquidity in the market and, therefore, again rise in prices. Although some caution of families in terms of purchases of durable goods cannot be ruled out.

In an econometric model for estimating inflation in Chile carried out together with Professor Oscar Rodríguez, we determined that an increase of one percentage point in general inflation in the previous period causes a positive variation of 4 times in the price of food the following month.

The foregoing prescribes high sensitivity of food prices to past behavior and expectations of the prices of the economy. Therefore, if there is no price control in the basic food basket, or as suggested by Professor Rodríguez; a consumption scheme that guides families to acquire goods and services in an orderly manner so as not to generate shortages (shortages) that push prices up, a sixth withdrawal will unfortunately affect the most vulnerable households in our country.

The slow reduction in general inflation to March 2023 of 11.1% (7% higher than the base target) is evidence that the economy still fails to reduce the impact of excess spending that accumulated in previous years.

The situation for this second quarter of 2023 is complex, since it is natural for households to request and ask for support to overcome a scenario of increased unpaid debts (2.1% more compared to December 2021) in the retail sector (45%) followed by unpaid debts with banks 1% more than the previous quarter (26%).

How could a new withdrawal of funds not go through the market?

When you pass the money from one account to another and it continues in the financial system through the payment of debts, for example. It is a movement that decapitalizes and negatively affects medium and long-term investment, but it helps to decompress the stress caused by the burden of debts and their respective interests for those families that are in arrears with the system.

The number of debtors of consumer loans with banks in 2022 practically increased by 36% compared to 2021 for amounts up to 20 UF ($800,000 approx) while for amounts up to 50UF ($1,800,000 approx) the increase was 15 % compared to Dec 2021. The average delinquency rate with banks for more than 90 days increased twice compared to 2021.

What could be done then?

As a society, we are experiencing the economic effects of the largest injection of money approved for the Chilean economy. However, the multiplier effect of money and its passage through the market, had its less kind side with the general increase in the price level and in particular, that of food. And here we must insist on the sensitivity of food prices as we have seen in their past behavior and in inflation expectations, market concentrations, external events, among others.

How could the rise in food prices be dealt with?

In the model estimated with Professor Rodríguez, we determined that in the retail market, supermarkets, both in Chile and in the world, are gaining more and more prominence as spaces for the purchase of food for families and, given the large volumes of sales that trade, the generation of economies of scale in the different phases of the logistics chain based on their market power, the transfer to the market price is facilitated.

Now, the challenge is how to increase or maintain low price strategies in this type of market where we know that there are stories of collusion and predation with smaller stores. Surely the National Economic Prosecutor’s Office could give us some suggestions regarding the promotion of competition.

For Professor Rodríguez, the current scenario is different because, given that economic agents are rational; an increase in income that could be generated from a possible withdrawal will direct consumption towards food and pension products and not durable goods as in previous withdrawals. The current loss of value of the local currency generated by inflation could encourage another use alternative for savings or investments in foreign currencies.

A suggestion that the professor provides us is that if a new withdrawal is approved; It would not hurt a government campaign to make suggestions for the use of resources so that families can orient themselves in an orderly manner and so that inflationary effects are controlled.

And here I totally agree with the teacher. I believe that a lesson from this process is that conducting an economic policy necessarily involves financial education (hopefully from school age) to know how much our consumption/investment decisions have an impact on the economy as a whole and therefore especially on the population. more sensitive to these events.

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Source: Elmostrador





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