Chile shifts to damage control with new pension proposal

Chile’s government moved to head off a controversial pension bill that threatens to stoke inflation already running at the fastest pace in almost 14 years, presenting its own withdrawal proposals that would limit the impact on consumer spending.

Finance Minister Mario Marcel said the government would submit a bill that will allow a withdrawal from pension savings for specific purposes, such as paying utility bills, alimonies, past-due mortgages and for a first home. The limited drawdown would prompt pension funds to sell assets worth about one tenth of those liquidated in previous withdrawals.

“This allows us to ensure that it won’t affect all Chileans by having an effect on inflation,” Marcel said in a conference in Santiago on Tuesday. He went on to recognise that “debts are a complicated issue in Chile and cause a lot of family distress.”

Lawmakers were due to debate a rival legislation today that would allow another round of early pension withdrawals, without any conditions on what people could spend the money on. The government has repeatedly said it opposes the bill because of the impact on inflation and that it plans to present a broader pension reform. The latest proposal is a recognition of the political cost of opposing drawdowns to a government that has been in office for just one month.

Chile’s benchmark S&P IPSA stock index dropped 0.45 percent following the announcement, after rising as much as 0.4 percent earlier in the session.

Faint Praise

The government’s proposal is positive compared with the legislators’ one because it sets limits on withdrawals, said Jorge Selaive, chief economist at Scotiabank Chile. He estimates new drawdowns wouldn’t exceed US$2 billion, compared with the US$50 billion withdrawn under three previous bills.

Still, “the negative aspect is that the bill resorts once again to pension funds instead of giving direct subsidies for people in need, of about the same amount,” he said.

While opposition lawmaker Javier Macaya said the proposal represents the failure of the government to align its own coalition against the bill currently in congress, the government announcement was well received by allies in the Communist Party.

“I appreciate that the government is open to a new withdrawal of pension funds, taking the precautions and safeguards that the economic situation requires,” Communist Party deputy Karol Cariola said via Twitter.

Chilean lawmakers have approved three previous rounds of withdrawals, stoking economic growth as well as inflation that reached 9.4% in March. A fourth bill failed to make it through Congress late last year.