A possible loss of bonuses?
In dialogue with Ámbito, the Senior Lawyer of the Legal Department-Labor and Contentious Sector of KPMG Uruguay, Lucia Cabrera, He explained the role that the Pension Savings Fund Administrators play today, the operation of which is currently being questioned by this campaign.
“The AFAP is a private company whose sole purpose is the administration of pension savings funds, that is, the administration of the money that comes from the contributions of workers. This implies that the AFAP will do investments on the money that it manages,” he said, adding that “all this action is controlled by the Central bank”, for those who “do not have the freedom to do what they want, it is determined by law which investments they can make, which they cannot, and there is also strict control by the Central Bank to ensure that they are carried out effectively and that all regulations are complied with.”
According to the expert, the AFAPs have “the role of seeking investments, making the investments and obtaining cost effectiveness for those investments that today are on average 3% annually.” “It is its only role, once the person meets some requirement to receive the money, the AFAP pays that money, except in the case of retirement, where the administrator sends the funds to an insurance company that today is only the State Insurance Bank (BSE) and this is the one who makes the payment,” he explained.
Cabrero added that “one of the main proposals of the plebiscite of Constitutional reform is precisely the elimination of the AFAP”: “This would imply the return to the single system, that is, the elimination of the mixed systemwhich implies that it will be managed solely by each particular entity, the Social Security Bank (BPS)”.
Increased public spending and tax hikes
The most palpable effect of the possible constitutional reform would be a strong increase in public spending, instantly, due to the anchoring of the minimum wage to the national minimum wage.
To meet this cost, “more than 1.1 billion extra dollars per year would be needed,” said the director of the Center for Studies of Economic and Social Reality (Ceres), Ignacio Munyo, estimating the calculation at 1.5% of GDP.
Meanwhile, the 5-year reduction in the retirement age would represent an increase of nearly $3 billion, including BPS, as well as the Military, Police and Parastatal funds, equivalent to 4% of GDP.
At the same time, there is a consensus among economists that the modification would mean an increase in the Income Tax on Business Activity. (IRAE), he Wealth tax and the highest ranges of the Personal Income Tax (IRPF), which would entail “serious damage to private investment and the future growth of the economy.”
Uruguay could lose its investment grade
If Uruguayans validate the changes in a popular consultation, it could affect the international view on the legal security and clarity in the rules of the country’s game, undermining international confidence and affecting the investments.
“Uruguay It is a country that is characterized by providing legal certainty and thus spending on retirements and pensions will skyrocket. We run the risk of losing our investment grade,” said the Minister of Labor and Social Security, Pablo Mieres.
Consequences of the elimination of the mixed system
“The elimination of all those issues that the existence of the AFAP introduced, such as the possibility of obtaining a bonus or increased benefit “from the income obtained from the investments made by the administrator with the contributions”: “When an affiliate contributes to the BPS, he will then receive a benefit according to what he contributed. However, with respect to the AFAP, what it does with the money it receives from the contribution is make investments that generate rent, which implies that later there will be an additional benefit for a larger amount in terms of retirement,” said Cabrera.
The KPMG lawyer mentioned other benefits of the current system such as “the lack of limitssince retirement depends directly on the amount contributed to the individual account.” “The same does not happen with regard to retirement from the BPS, where there is a limit, regardless of whether the person has contributed much more during his or her life, there will be a retirement limit that is now more or less around 80,000 pesos,” he said.
Possibility of lawsuits against the State
This scenario would trigger legal uncertainty “not only because of the confiscation of savings managed by the AFAPs, but also because it calls into question the 1996 reform,” warned the Exante partner, Pablo Rosselli.
Munyo had a similar opinion, adding that “it is possible that members will file lawsuits for the confiscation of savings managed by the AFAPs,” estimated at 22 billion dollars. He also anticipated that “the AFAPs could do the same, claiming lost profits for the commissions scheduled until the members retire.”
The director of Ceres considered that, if approved, the initiative of the union center would imply a reduction of the private savings, due to the ban. “People with higher incomes will look abroad for alternatives, as international evidence shows,” he said.
Munyo indicated that this would have a regressive effect in income distribution. “Higher-income contributors will have incentives to reduce their contributions and benefit disproportionately from the minimum benefits of the new system,” he said.
Along these lines, Rosselli stated that “the indexing from minimum pensions to the National Minimum Wage will end up encouraging future governments to set back the minimum wage, as was the case until 2005.” In parallel, he argued that “people with better careers and higher incomes are those who can accumulate 30 years of service by the age of 60, while younger people will have to work beyond that age.”
Source: Ambito
