Raiding Pensions Is Step in Wrong Direction for Uruguay, by Paz Gómez


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Unions Push to Abolish Private Social-Security Accounts

The days of Uruguay’s private pension funds in social security could be numbered. The incumbent system has for 27 years avoided unfunded liabilities and covered 95 percent of people aged 65 and above, but politically influential unions have grown uncomfortable with the earnings of financial service providers.

On April 27, 2024, union confederation PIT-CNT submitted a petition, with 430,000 signatures, to the Electoral Court for a referendum to abolish Pension Savings Fund Administrators (PSFAs). PSFAs manage individual saving accounts, but the contributions come from payroll taxes. The confederation would like to divert those taxes into a publicly managed asset pool.

If the Electoral Court authorizes the referendum and Uruguayans eliminate PSFAs, this will threaten the system’s coverage and sustainability. Further, such a move reduces legal certainty and hints at higher taxes to come, thus reducing investor confidence.

PIT-CNT collected 430,000 signatures nationwide in five months, an ominous total. Now the Electoral Court must verify the validity of at least 276,151 signatures (10 percent of registered voters) to authorize the referendum. If certified, the referendum will take place on October 27, along with the presidential and legislative elections.

For foreign investors, this near-certain referendum holds more significance than the presidential election. Such a union-led initiative seeks to place Uruguay among the Latin American countries that have nationalized private retirement savings. Peru and Chile, for instance, withdrew billions of dollars from accounts in 2020. Argentina confiscated private pension funds entirely in 2008. As a result, its social security unfunded liability exceeded 33 of obligations percent by 2022.

What Is at Stake in Uruguay’s Pensions

Uruguay’s social-security system is one of the best in Latin America.The 2023 Global Pension Index, released by consulting firm Mercer and the CFA institute, ranked Uruguay as the second best in the region—only behind Chile—and 15th out of 47 countries worldwide. Chile overcame compromised private pensions with a wealthier economy and a new sovereign wealth fund.

Social security operates as a mixed system. On one side, the system comprises different public agencies. The Ministry of Labor and Social Security, the Social Security Commission, and the Social Security Bank are the most important. They collect payroll taxes, hold around two-thirds of savings in an asset pool, and distribute benefits to workers and retirees.

On the other side, PSFAs maximize profitability, ensuring workers receive a better return. Workers can choose among four PSFAs (República, Sura, Unión Capital, and Integración), and create a private account to save at least 5 percent of their monthly salaries. They can also make voluntary contributions to improve their financial position. In total, the four PFSAs manage $22.5 billion, equivalent to 30 percent of GDP. If anything, Uruguay needs more PSFAs for greater competition in the system, not zero.

Social-security coverage includes unemployment insurance, parental leave, and retirement payments for the elderly, disabled, and injured. While Social Security Bank pensions follow a defined-benefit approach—in proportion to an individuals’ salary history—PSFAs allow workers to save more and improve their pensions with higher returns.

According to Sebastián Peaguda, general manager at Sura PSFA, “Uruguay, throughout its history, has never had national savings of such magnitude, which only occurred after 27 years [of establishing a mixed system].”

Moreover, as a positive side effect, the capitalization of pension funds has bolstered the Uruguayan stock market. Investment by private pension funds in the productive sector surged from $133 million in 2008 to $4.7 billion in 2023. These investments have supported infrastructure projects and private initiatives.

Agustín Sheppard, risk manager at Unión Capital AFAP, emphasizes that “PSFA investments promote economic growth, employment, and quality of life, while enhancing corporate governance in listed companies. This creates a virtuous cycle benefitting workers’ individual saving accounts.”

The Smoke and Mirrors

Nathalie Barbé, head of the Social Security Workers’ Association, argues PSFAs do not reinvest in the traditional social-security system. Barbé contends that taxes should not fuel profits for financial service providers. Her big assumption is that public workers could better manage the taxes, and then they could expand social-security benefits for workers and retirees.

Peaguda counters that the PIT-CNT proposal mirrors Uruguay’s social security of the 1950s, when the state monopolized retirement funds. That system collapsed as Uruguay’s birth rate declined by one-third from 1950 to 1995. The number of contributors decreased and the Social Security Bank cannibalized financial reserves to pay pensions. This led to the adoption of the current mixed system in 1996 through constitutional reform: “Demographics eroded reserves, but the Social Security Bank and the government also made suboptimal investments, resulting in reserves being depleted.”

Savers’ money is at risk, but the constitutional reform is far from settled. A poll conducted by consulting firm Cifra in April 2024 revealed only 41 percent of voters wanted to abolish private retirement savings. However, results also revealed that one-fourth of voters had not decided yet and that referendum support had increased by 5 percent since February.

Socialist organizations and unions have swiftly mobilized against private retirement savings. In just five months, they collected nearly double the required signatures to initiate a referendum, and their proposal is gaining traction.

Abolishing private pension funds would impact not only retirees but all Uruguayans. Reversing a constitutional amendment swiftly and jeopardizing the sustainability of social security would send a negative signal to investors. Although not right away, Uruguay would also need to allocate more public spending to social security.

Workers, employers, and investors still have an opportunity to safeguard a system that has provided Uruguayans with sustainable social security, while contributing to the country’s development. Uruguayans should protect their savings by voting against the collectivist initiative targeting social security capitalization.

The opinion of this article is foreign to Noticiero El Vigilante


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