1.1 The setting

Chile's three-pillar retirement system was introduced in 1981. Its largest, and most widely admired, component was a mandatory funded DC scheme covering formal sector workers who contributed 10% of their taxable income into an individual account managed by pension managers known as Administradoras de Fondos de Pensión (AFPs). AFPs are for-profit and single-purpose private firms in charge of collecting contributions, keeping records of individual accounts, investing funds, and paying some benefits such as disability and old-age pensions. There was also a government-financed Solidarity Pension scheme that paid non-contributory benefits for very low-income retirees. Eligibility for a Solidarity Pension required a non-existent or low self-financed pension, sufficient years of residency, and being among the poorest 60% of individuals at a given age.Footnote ¹ Finally, there has long been a voluntary savings pillar in the Chilean system, aimed at boosting self-financed old-age benefits; this pillar included state-matched incentives and tax subsidies for participants.Footnote ²

During the Covid pandemic, political pressure mounted to grant system participants early access to their individual pension accounts, which historically had been illiquid prior to retirement age. With practically unanimous support from Congress, three early withdrawals were eventually permitted: the first began in July 2020, the second in December 2020, and the third in April 2021. Withdrawals could be made on a voluntary basis for up to one year after the law's passage, and access was unconditional, without requirements or restrictions. For the first two rounds, only active affiliates and pensioners were allowed to tap their savings, while annuitants were also included in the third round.Footnote ³ The second withdrawal was the only one that required individuals to pay income tax on the amount taken, and only if their monthly earnings exceeded US $2,100.

So-called ‘leakage’ of assets from funded pensions has long attracted researcher and policymaker attention, even well before the Covid-19 pandemic.Footnote ⁴ On the whole, these studies found that workers tended to take early withdrawals from their retirement accounts without understanding the likely consequences for their subsequent retirement wellbeing (Lee and Hanna, Reference Lee and Hanna2020). This is, in part, because pension participants often underestimate their potential longevity (O'Connell, Reference O'Connell2011; O'Dea and Sturrock, Reference O'Dea and Sturrock2023; Hurwitz et al., Reference Hurwitz, Mitchell and Sade2022), and hence they under-save and overspend as a result. Moreover, and particularly in Chile, little effort was devoted in the past to enhancing workers' financial literacy, which helps explain why so many were very poorly-informed about the importance of saving for retirement and the role of the contributory DC system (Arenas de Mesa et al., Reference Arenas de Mesa, Bravo, Behrman, Mitchell, Todd, Kay and Sinha2008; Garabato, Reference Garabato2016).

During the pandemic, several other nations also permitted Covid-driven pension fund withdrawals (e.g., Dominguez and Pierola, Reference Dominguez and Pierola2021; Guerrero, Reference Guerrero2021; Marusic, Reference Marusic2021), yet we are aware of only a few academic studies that have sought to evaluate the factors driving early withdrawals on pension participants during the pandemic: two on Australia (Bateman et al., Reference Bateman, Campo, Constable, Dobrescu, Goodwin, Liu, Newell and Thorp2020; Wang-Ly and Newell, Reference Wang-Ly and Newell2022), and two on Chile (Lorca, Reference Lorca2021; Madeira Reference Madeira2022). The Australian analyses found that the majority of those permitted to take up to AU$10,000 as a maximum payout withdrew the entire amount permitted. Additionally, half of the Australians taking payouts either underestimated or failed to consider the impact on their retirement incomes. Lorca (Reference Lorca2021) simulated the impact of the first withdrawal in Chile, but he lacked data on actual withdrawal patterns and amounts across all three rounds of withdrawals.Footnote ⁵ Madeira (Reference Madeira2022) also used pre-pandemic data from 2017 to simulate the potential impacts of withdrawals on debt. Accordingly, our contribution is to provide a detailed examination of the factors driving and consequences of permitting early pension system withdrawals in Chile. The results suggest lessons not only for that country but for others that might contemplate following in that nation's footsteps.

1.2 The data

In the face of Covid's onset in 2020, Chile's Congress permitted early withdrawals from the national mandatory DC accounts, something that had never occurred previously in that country. Specifically, participants were allowed to withdraw 10% of their mandatory pension savings balances three distinct times during the pandemic, with lower and upper withdrawal bounds (and these limits remained in place for all three withdrawal periods). Figure 1 shows the amount (in US $) that could be drawn as a function of a participant's pension account balance. The design established four tranches: the first went from $0 to US $1,400; the second included balances from US $1,400 to US $14,000; the third tranche from US $14,000 to USD $62,000; and the final tranche above US $62,000.Footnote ⁶ In our data, which we describe below, we can see that approximately 20.1% of individuals who took the first withdrawal fell in the first tranche (thus emptying their accounts); 43.3% fell in the second tranche (withdrawing between 99.99% and 10.01% of their accounts); 35.2% fell in the third tranche (withdrawing effectively 10% of their accounts); while only 4.6% were in the fourth tranche (withdrawing less than 10% of their accounts). These numbers did not vary greatly for the second and third withdrawals.

Figure 1. Chile's pension withdrawal rule design during the pandemic.

Source: Authors' elaboration.

It is important to note that Chileans with assets in the first (lowest) tranche were allowed to withdraw 100% of their pension savings immediately. In the case of the second tranche, the withdrawal amount was capped at US $1,400, meaning that the percentage of the account balance that could be withdrawn tapered down from 99.9% to 10% for that tranche's upper limit. The third tranche was the only one where the allowable amount withdrawn was fixed at exactly 10% of the participant's balance in the pension. Finally, for the fourth tranche, individuals could take up US $6,200, meaning that the maximum percentage of their balances they could withdraw was less than 10%. Below we show that the withdrawal rule design likely resulted in different impacts across individuals, because of the differences in the percentage of the balances that could be taken.

To analyze the early withdrawal patterns, we use an anonymized database of the Chilean Pension Regulator containing administrative records for all individuals with pension accounts in the Chilean pension system. This allows us to characterize several aspects of the withdrawal process, including the number of withdrawal requests; the average amount withdrawn; the timing of withdrawals; and how much was withdrawn, both in monetary terms and as a percentage of participants' initial account balances. Accordingly, we can identify accounts with zero funds remaining as a result of the withdrawals.Footnote ⁷ Additionally, the administrative records provide us with key socioeconomic information including the worker's gender, age, density of employee contributions, and average earnings prior to the pandemic, along with pension savings history, and saving patterns post-withdrawal.

From the register of early pension fund withdrawals, we obtained data on each system participant including the date(s) when withdrawal(s) were requested; the amounts withdrawn in Chilean pesos and as percentage of the person's balance; and the withdrawal amounts requested as a percentage of the maximum amount to which the person was entitled.Footnote ⁸ This information was captured from July 2020 until April of 2022.Footnote ⁹ Next, we used the Regulator's administrative records to obtain two types of variables. The first set corresponds to time-invariant characteristics for each pension participant: gender; nationality (Chilean or foreign); age (measured at the time the first withdrawal was permitted); the person's density of contributions (or percent of months contributed) from having joined the system until June 2020; the person's status within the pension system (non-retired member, retired, deceased, disability benefit recipient); and the difference between the person's actual equity exposure in his/her mandatory pension savings during June 2020 and the equity exposure under the system's default investment option. The second group of variables was time-varying and included each individual's wage and mandatory as well as voluntary savings balance prior to the early withdrawal window, between August 2019 and October 2021.

To this core dataset, we appended additional administrative information drawn from the regulator's UI database for the months January 2020–April 2021. This is important as it permits us to evaluate the extent to which other sources of pandemic funding may have mitigated participants' early pension withdrawals. Since 2002, formal sector workers have been mandatorily affiliated with the Chilean Unemployment Insurance system, to which they are required to contribute 3% of their pay (to a cap). A portion of this contribution was invested in workers' individual unemployment accounts, with the remainder going to finance the Unemployment Solidarity program.Footnote ¹⁰ In the event of a job loss, workers could first receive payments from their own individual unemployment accounts; when their accounts were exhausted (and if they remained jobless), they could apply for additional benefits from the Unemployment Solidarity Fund. These UI benefits are subject to a floor and a ceiling.

During the pandemic, there were also other extraordinary measures passed, supportive of employment and household consumption. The Employment Protection Law (enacted in 2020) introduced job retention schemes where the employment contract could be suspended or working hours reduced in areas subject to lockdowns and for parents taking care of small children. Alternatively, employers could agree with their workers individually or collectively to cut worktime by up to 50%, accompanied by a pay reduction of 25% (the employer had to cover 50% and the UI system 25% of the worker's pre-pandemic earnings).Footnote ¹¹

Using the administrative records, we have collected data for each person-month in our file, including indicators of when the individual received UI benefits, and whether the individual received benefits associated with the JP laws. This information permits us to evaluate the extent to which other sources of pandemic funding mitigated participants' early pension withdrawals.Footnote ¹²

Though our administrative data are unusually rich in terms of the labor market behavior and pension savings of participants, the dataset does not contain information regarding other factors that could have been important such as average wealth levels, financial knowledge, level of impatience, and trust in the pension system. For this reason, we also used information from the 2015 Social Protection Survey (EPS or Encuesta de Protección Social) to complement our analysis.Footnote ¹³ Specifically, we extracted from the EPS several variables indicating factors that varied across participants' regions.Footnote ¹⁴ These include average health status (% saying in Excellent or Good health); years of education; non-house savings; financial fragility (% saying they could not access half a year of income within a month); the percent who ever contributed to the pension system; the percent with a favorable attitude toward pensions financed by individuals' own efforts; the percent viewing a state-run pension fund manager favorably; the percent having a positive view of the Chilean pension system; and the percent of respondents who believed they would live longer than population life tables (optimism regarding longevity). For each of these variables, we compute means at the regional level which were then imputed to plan participants using region of residence in the Pension Regulator database.Footnote ¹⁵ (See Appendix Tables 1 and 2 for variable definitions and descriptive statistics.)

1.3 Hypotheses

In what follows, we examine several potential explanations for early pension withdrawal patterns that may help explain Chileans' eagerness to pull their pension assets out of the system. Specifically, we evaluate the following hypotheses:

Other indicators of trust in the system from the EPS include the percent of people in the participant's region approving of the idea of self-financed pensions, having a positive image of the Chilean pension system, and favoring the adoption of a state-run AFP. We hypothesize that the first two factors would be associated with a lower probability of and smaller withdrawals, as these indicate support for the existing system. A final variable indicates mixed support for the system, as a state-run AFP did not exist at the time.

2.1 Descriptive statistics

Table 1 reports the main characteristics of the pension system's active members (i.e., excluding retired and deceased individuals as well as foreigners) along with the characteristics of those taking withdrawals. The bivariate analysis identifies members according to the number of early withdrawals they took, namely 0, 1, 2 or 3;Footnote ¹⁸ means and significance tests for their differences are reported, comparing individuals with no withdrawals versus those with one or more withdrawals. Overall, we see that more than 66% of all 8.9 million active participants took withdrawals all three times, while the group with no withdrawals is the smallest (about 3.4% of workers). Overall, we see that men, older persons, the higher paid, those with the greatest history of contributions, and having larger pension account balances were significantly more likely to take withdrawals. The typical withdrawal was around 91% of the workers' initial account balance at the outset, with subsequent withdrawals falling to roughly half (55%) of the initial account at baseline. Amounts withdrawn totaled between three to nine times the workers' average monthly earnings, underscoring just how large the amounts taken were. Interestingly, there is also a positive correlation between participants' historical contribution density, defined as the fraction of years each person contributed since joining the system until 2020, and the number of withdrawals taken.

Table 1. Characteristics of those taking 0, 1, 2, 3 early pension withdrawals

Notes: * p < 0.10; **p < 0.05; ***p < 0.01. This table reports t tests on the means and significance levels for the differences reported, comparing individuals with no withdrawals versus those with one or more withdrawals.

Source: Authors' elaborations.

The fact that higher-paid individuals, as well as those with higher pension account balances and higher pension contribution densities were more likely to pull money out of their pensions contradicts H1, since if economic hardship had been the main factor driving people to withdraw pension assets early, we would have expected a negative correlation. In any case it is necessary to distinguish between the number of withdrawals (and absolute amounts withdrawn), and the withdrawal taken as percentage of the initial balance. We explore this point below, by summarizing the characteristics of people who completely emptied their pension accounts after the first, second, and third withdrawals; and with a multivariate regression analysis in the next section.

We also find that average withdrawal amounts are positively correlated with the number of withdrawals taken, and the differences between those taking nothing versus 1, 2, or 3 withdrawals are all statistically significant. Moreover, the percentage taken of the starting pension balance is negatively correlated with the number of withdrawals. This pattern is influenced by the withdrawals' design, which allowed those with lower balances to take out up to 100% of their balance, while simultaneously capping retirements for higher balances at levels that could be less than 10%. Individuals having only one withdrawal took over 90% of their initial balances, while those with three withdrawals took a total of 55.38%. Also, for those individuals with a single withdrawal, the amount received was around 1.36 times their average monthly earnings, whereas this number rises to 8.63 times for the group with three withdrawals.Footnote ¹⁹

Table 2 summarizes the factors characterizing people who completely emptied their pension accounts after the first, second, and third withdrawals (the comparison group in each case is those who did not empty their accounts). As before, persons likely to end up with zero balances after each withdrawal were more likely to be women, younger, lower earners, and have had lower initial pension balances as well as lower contribution densities.

Table 2. Characteristics of those leaving a positive versus a zero pension balance due to early withdrawals in 1st, 2nd, or 3rd withdrawal periods

Notes: * p < 0.10; **p < 0.05; ***p < 0.01. R1, R2, and R3 are indicators of whether the participant took an early pension withdrawal during the first, second, or third window when permitted to do so.

Source: Authors' elaborations.

Table 2 indicates that those having received unemployment benefits as well as JP benefits were actually less likely to end up with no pension assets at all. Similarly, those having saved in voluntary personal accounts were less likely to have withdrawn their pension assets in full. Hence this provides a mixed picture regarding H1: some people who saved more withdrew more, while others who became unemployed withdrew less.

2.2 Multivariate results

Next, we contrast the non-parametric results of the last section with multivariate regression analyses focusing on two dependent variables in Table 3. The first reports peoples' total number of withdrawals (#Withdrawals); the mean of this dependent variable was 2.4. The second, Wd/Starting Balance, refers to the total amount withdrawn as a percentage of the participant's starting account balance in July 2020 (just before the first withdrawal was permitted). The mean of this variable was 63.6%. We use the similar empirical specifications for both dependent variables (#Withdrawals and Wd/Starting Balance) estimating OLS regressions with robust standard errors:Footnote ²⁰

(1)$$Y_i = {\rm {\rm B}}X_i + {\rm \Gamma }Z_i + \epsilon _i$$

Table 3. Multivariate analyses of early pension withdrawals

Robust standard errors in parentheses. *** p < 0.01, ** p < 0.05, * p < 0.1.

Source: Authors' elaborations.

Explanatory variables in set X _i include demographic factors (female, age, and age-squared), the participant's historical density of contribution, account balance immediately prior to the pandemic, and equity share compared to the government default level. We also include additional controls including average earnings prior to the first withdrawal period, whether the participant received any unemployment or employment protection benefits during the pandemic, and the participant's voluntary saving balances in APVs, CAVs and Agreed-on Deposits accounts. Finally, in set Z _i we incorporate the EPS variables to test our hypotheses regarding regional attitudes.

The first column of Table 3 reports OLS estimates for the #Withdrawals dependent variable.Footnote ²¹ Here we see that, holding other things constant, women were less likely to take all withdrawals allowed, although they did take a higher percentage of their overall account balances. One reason they may not have taken withdrawn in all periods is that they may have exhausted their accounts early on, due to having low balances. Interestingly, older people were more likely to take all three withdrawals, but their probability of taking a withdrawal peaked at around age 45 and declined thereafter; older workers also withdrew a smaller share of their total account values. This may speak to changing financial needs over the life cycle. Moreover, people who were more closely attached to the pension system, having had higher contribution densities, were also more likely to take withdrawals each time, but were less likely to exhaust their balances. Having higher account balances and earning more also led to fewer withdrawals and smaller payouts relative to their starting account balances.Footnote ²² These last two findings indicate that the less well-off were more likely to pull money out, suggestive of financial hardship. On the other hand, workers who held more equity in their pension portfolios than the government default allocation took fewer withdrawals, but they removed a greater share of their account balances when they withdrew. Thus, there is only mixed support for the hypothesis that those confident about their own investment savvy were most likely to pull money out.

A further exploration of the financial hardship hypothesis can be explored by the effects of UI and JP benefits. We see that recipients of unemployment benefits or government employment benefits during the pandemic were more, rather than less, likely to take more withdrawals; they also withdrew a larger share of their pension accounts. Accordingly, there is little evidence that the social insurance programs obviated the need for Chileans to take early pension payouts. People who had saved additional money in the most liquid Account 2 were least likely to withdraw and withdrew less, the opposite of what we anticipated; conversely those holding Deposits took fewer payouts, but their payouts were larger when they did. For this reason, the evidence is mixed as to whether those with the least liquid voluntary savings were most likely to take early pension withdrawals.

Turning to the EPS variables, the results show that people living in communities with a higher fraction in good health, with higher educational attainment, where people had more positive views of the pension system, where they had heard about the Solidarity Pension, expected an AFP pension, and where people were more optimistic about survival, were all likely to have significantly more withdrawals. This seems inconsistent with the hypothesis that distrust drove withdrawals. Nevertheless, people with these same attributes took a smaller share of their accounts when they claimed early withdrawals. Conversely, in communities where people had more non-housing savings, had heard of the unemployment system, and believed that retirement should be self-financed, were less likely to take multiple withdrawals, yet they tended to take a higher percent of pension assets. Hence the evidence on the trust hypothesis is clearly mixed.

2.3 Additional results

Results obtained thus far shed some light on the role of the varying motivations people may have had when deciding whether to take early withdrawals. Specifically, we find evidence that lower earners and those with smaller initial account balances were most likely to withdraw their funds, consistent with the hardship view. Yet receiving unemployment benefits and JP benefits did not offset peoples' interest in taking early pension withdrawals.

As the incentives and motivations to make withdrawals may have changed between each of the three withdrawal opportunities, we next estimate regression models for each withdrawal period (R1, R2, R3) separately, as well as for different pension balance quartile.Footnote ²³ Figure 2 shows the marginal effects of having received UI six months before each withdrawal window on the probability of withdrawing pension assets, by balance quartile and withdrawal period.Footnote ²⁴ The top panel depicts the effects of receiving UI benefits financed from workers' own individual accounts, while the bottom panel reports the effects of benefits financed from the Solidarity Fund (payable only after the worker's individual account was exhausted). Notably, the effects are virtually nil for the top two account balance quartiles, whereas for the two lowest quartiles, there is some evidence suggesting a positive effect for both the 2^nd and 3^rd withdrawal periods. That is, receiving UI from one's individual account was positively associated with taking an early pension withdrawal for those participants having the smallest pension balances at the outset. This could be related to individuals attaching an option value to making withdrawals, even though they were receiving UI benefits. Since these benefits have a limited duration (five months) and are decreasing in time (see Appendix 1), it may have been attractive to insure against the possibility of UI running out before having found a new job. The second panel shows the effects of UI benefit receipt financed from the Solidarity Fund, where once again there is again no significant relationship between UI receipt and withdrawals for the top three balance quartiles. Also, for the lowest-account workers, there is weak evidence suggesting that UI receipt did have the expected negative effect during the 1^st and 3^rd withdrawal periods, for the lowest and second quartiles, respectively.

Figure 2. Effects of unemployment insurance on the probability of pension withdrawals, by withdrawal Period (R1, R2, R3) (a) Effects of unemployment insurance (Individual Account) on probability of withdrawal. (b) Effects of unemployment insurance (Solidarity Fund) on probability of withdrawal.

Notes: Panel A shows the relationship between UI benefits received from the worker's individual account on the probability of making pension withdrawals in the first, second, and third periods (R1, R2, R3, respectively), by balance quartile. Panel B shows the relationship between UI benefits received from the government's Solidarity Fund account on the worker's probability of making pension withdrawals in R1, R2, and R3, by balance quartile. Account balance quartile defined prior to R1 (constant across periods). We focus on individuals who had a positive balance in their pension accounts, even if they took the first and/or second withdrawals.

Figure 3 reports the association between self-financed and Solidarity-financed JP benefits and the probability that workers withdrew their pension funds in each period, by starting balance quartile. JP benefits could be received while people were still employed, as distinct from UI benefits. Here results are insignificant for the top three balance quartiles, but for the lowest quartile, results again differ markedly. During the 1^st withdrawal period, the self-financed JP benefit had the intended (negative) effect on the probability of taking out pension savings. By contrast, JP receipt lost its intended effect in R2, and once again lowered the probability of taking the third withdrawal for those in the lowest quartile. The second panel illustrates the effect of government-financed JP benefits, where again there was no effect for the top three balance quartiles. More striking is the positive effect of JP benefit receipt for the lowest quartile pension savers: the association was positive and significant for R1.

Figure 3. Effects of job protection benefits on probability of pension withdrawal, by withdrawal period (R1, R2, R3). (a) Effects of job protection (Individual Account) on probability of withdrawal. (b) Effects of job protection (Solidarity Fund) on probability of withdrawal.

Notes: Panel A shows the relationship of JP payments received from the worker's individual account on the probability of withdrawal in the first, second, and third period (R1, R2, R3, respectively), by balance quartile. Panel B shows the relationship between JP payments received from the government Solidarity Fund on the probability of withdrawal in R1, R2, and R3, by balance quartile. Account balance quartiles defined prior to R1 (constant across periods). We focus on individuals who had a positive balance in their pension savings' accounts, even if they took the first and/or second withdrawals.

Overall, then, financial hardship appears to have been a stronger motivation for taking pension money early in the first period, particularly among those with the least in their pension accounts at the outset of Covid, but the effect declined thereafter. Moreover, in some cases, people who received JP benefits paid from their individual accounts were less likely to take early pension withdrawals, though they were less of a deterrent for government-financed benefits.

2.4 Where did the money go?

In view of the fact that so many Chileans took such a vast portion of their pension money from their accounts early, a natural question arises as to how people used these funds. Central Bank of Chile (2020) analysis reported that some of the early pension withdrawals were used for durable goods consumption, as well as for emergency spending, debt repayment, and housing; some of the money remained in household current and savings accounts by the end of 2021 (Central Bank of Chile, various years). The boost in household spending, along with high energy, food and raw material costs, generated inflationary pressures (13% annual inflation as of July 2022), which in turn prompted a contraction in monetary policy (Central Bank of Chile, 2022).

Our administrative data provides evidence regarding what happened to workers' voluntary savings accounts, as summarized in Figure 4. Here we see that net changes in the less liquid accounts were essentially uncorrelated with the three withdrawal dates (indicated by dotted vertical lines). By contrast, assets in the most liquid ‘Cuenta 2’ holdings did rise quite markedly immediately after each withdrawal date was announced. Moreover, those taking two or three withdrawals were most likely to move their assets to the liquid funds, suggesting that a substantial fraction of money leaving the pension system due to early withdrawals was rolled over to these more flexible savings accounts.

Figure 4. Voluntary saving patterns over time, by type of account. (a) change in monthly balances in pension voluntary savings accounts (APV). (b) Change in monthly balances in account 2 (CAV or Cuenta 2). (c) Change in monthly balances in agreed-on account (Agreed-on deposits).

Notes: All three savings accounts reflect voluntary saving. Individuals who make APV savings receive tax incentives, but the tax benefits must be repaid if these savings are withdrawn prior to retirement. Account 2 savings receive no tax benefits, but they can be withdrawn at any time without any penalty. Agreed-on deposits are arranged between employees and their employers; these savings have tax benefits and can only be withdrawn at retirement.

2.5 Likely impact on expected future pension benefits

In this section, we analyze the expected impact of Chileans' fund withdrawals on their projected future pensions. First, we model the potential impact of withdrawals for hypothetical young participants of a given age and who had a reasonable accumulated balance when the pandemic struck. Second, we construct a range of representative individuals using as reference the wage and contribution levels actually observed among Chilean pension system participants. Both of our exercises' results should be interpreted as referring to expected impacts on self-financed pensions. Indeed, as explained before, since 2022, the Chilean solidarity pillar features a flat-amount State-financed pension, the PGU, which currently equals a monthly value of approximately USD 250 (slightly above the poverty line). This benefit is targeted to almost all Chilean citizens and the benefit received is independent of any self-financed pension. Given this design, our forecasts regarding the early withdrawal effects on future pensions should be interpreted as effects on self-financed pensions.

For the first exercise, we focus on a hypothetical 18-year-old male with monthly earnings of US $660 (the median pay level for Chilean workers). We also assume that this individual had a full contribution density history, and his fund earned an annualized real return of 4%. The contribution rate is 10% and real wages are assumed constant. We then simulate this person's pension fund balance until the legal retirement age (65), varying the age at which the 1^st early withdrawal occurred: 18, 19, and so on. We assume that all relevant variables (contribution density, returns, earnings, etc.) remain unaltered after the withdrawal. For each case, we calculate the percentage decrease in expected self-financed pension, relative to the case in which no withdrawal occurred. This is:

(2)$$Expected\;Fall_T = \left({\displaystyle{{Expected\;Pension_{T, Withdrawal, t}-Expected\;Pension_{T, No\;Withdrawal}} \over {Expected\;Pension_{T, No\;Withdrawal}}}} \right)\times 100$$

where T is the legal retirement age (65 for males). Expected Pension _T,Withdrawal is the individual's expected self-financed pension upon retirement if he made three withdrawals (the first occurring at age t (current age), and the subsequent two withdrawals taking place approximately six months apart from each other). Expected Pension _{T,No Withdrawal} is the expected self-financed pension benefit at retirement if no withdrawals had been made.Footnote ²⁵

Figure 5 reports the results of this exercise under two different withdrawal rules. The orange line assumes that the individual made three withdrawals of 10% of his balance each time it was permitted, five months apart. Under this scenario, the future pension loss is smallest if the withdrawals occur at a young age: if the funds are taken out at age 18, future pension benefits are projected to be 0.6% lower. Conversely, for someone who cashed out at age 64, the future pension is estimated to be 27% lower. Naturally, the reason for this difference is that younger individuals will have more time to rebuild their balances (assuming that they contribute throughout their careers).

Figure 5. Expected reductions in self-financed pension benefits for representative individuals (%).

Source: Authors' elaboration. Note: The figure shows the expected drop in future self-financed pension benefits for individuals taking early withdrawals at different ages (from age 18–64). Assumes constant real wage and monthly contributions from that age to retirement. The orange line shows the percentage change in expected pension benefit by age at the time of the first withdrawal, assuming that three withdrawals were taken. Each withdrawal is set at 10% of the pension savings' balance. Pension benefit changes calculated comparing the final pension versus the pension that would have been received if no withdrawals had occurred. The blue line assumes the lower and upper bounds were in place; hence balances below US $1,400 could be fully withdrawn, while those with balances over $62,000 were limited to withdrawals of $6,200.

The blue line incorporates the upper and lower bounds permitted for asset withdrawals shown in Figure 1. The lower bound and the possibility that very low-balance workers could take out more than 10% increases the impact on expected pensions. Thus an 18-year-old individual permitted to take 100% of his balance will now experience an expected pension decline of almost 4%. The divergence from the orange line continues to increase as the withdrawal age rises, reaching its maximum when for withdrawals made at age 22; in this case, the expected pension declines by more than 20%. After this point, the amount withdrawn is constant in monetary terms although it falls as a percentage of the accumulated balance, resulting in less severe drops in expected pension benefits. For our parameters, if the first withdrawal were made between age 32 and 53, 10% of the balance is taken out and both the blue and orange lines coincide. After that, the upper bound becomes binding. Notably, this means that, for a 64-year-old, the drop in expected pension is now 17% (as opposed to 27% for the case with no upper bound). We suggest that the presence of a lower bound accompanied with the possibility of taking all of the existing balance is particularly damaging for people whose balance is relatively low. Moreover, the upper bound gives greater protection for expected pensions of individuals with higher account balances. In other words, the design is regressive, versus a flat 10% withdrawal rule.

For our second projection exercise, we selected representative Chilean workers' earnings and contribution densities by age and sex, which we then use to project anticipated future benefits without and with pension withdrawals (assuming that participants took the maximum permitted each time, five months apart, as before). We also assumed that real earnings would grow at 1.5% per year, and we adjust contribution density patterns accordingly to their observed values before and after the withdrawals. Results appear in Table 4.Footnote ²⁶

Table 4. Expected self-financed pension benefit reductions due to early pension withdrawals, number of years required to make up shortfall, and years retirement would need to be delayed to make up shortfall

Notes: Projections assume 1.5% annual real earnings growth. Contribution density after withdrawals is estimated from data on groups by gender, age, and pre-withdrawal density. Years balance: number of years it would take for each illustrative individual's balance to return to its pre-withdrawal level. Years pension: number of years the individual would need to delay retirement for projected self-financed pension to be equal to that if no withdrawals had been made. Projected Pension 0 Wd/Poverty refers to the ratio of projected self-financed pensions to the poverty line if no withdrawals had been made, and Projected Pension 3 Wd/Poverty refers to the ratio of projected self-financed pensions to the poverty line assuming three withdrawals. For additional detail see Appendix 3.

Source: Authors' elaborations.

A first conclusion is that older workers' pension benefits would be projected to decline the most due to the early withdrawals, especially for the lowest paid and for those with the lowest contribution densities. Indeed, for those currently 55–65 (men) and 55–60 (women), projected benefits would be anticipated to drop by over 70%. This shortfall could be made up with 11 more years of work for the men, and 8.5 years of additional work for the women – well beyond the current normal retirement ages. Men and women age 45–55 with the lowest contribution density are expected to experience an estimated pension cut of 50% (for men; 54% for women). Projected drops are smaller for younger workers, but still, benefits for those age 35–45 would still be projected to fall by 23% for men and 28% for women in the lowest quartile. For the youngest group, age 16–25, pension benefits are forecasted to shrink by 16% for the highest paid men (18.9% for women) due to the early withdrawals.

The impact of the early withdrawals on wellbeing can be evaluated by focusing on the last two columns of Table 4, where we compare the projected self-financed pension for each group to the poverty line, without and with the early withdrawals.Footnote ²⁷ A value less than one indicates that the projected pension benefit would be anticipated to fall below the poverty line. One clear finding is that the lowest-paid group in each category would have been anticipated to have a projected benefit below the poverty line even without any withdrawals; this reality prompted the government's move to offer Solidarity pensions (Pillar I) under the Bachelet government. A second important finding appears in the rows indicated with an asterisk: here we see that people in these groups (2 and 11 for men, 6 for women) who took maximum withdrawals would move from a pension above to below the poverty line, due to the early withdrawals. Third, even the highest paid of each age group among women is seen to be quite financially fragile, as they are anticipated to have pension benefits below the poverty line with maximal withdrawals in all but one case. Based on these results, it appears that the early pension withdrawal program has regressive effects, cutting future pensions the most for workers earning lower wages and having lower contribution density. Moreover, as these individuals may be more likely to qualify for receiving non-contributory Solidarity benefits in the future, the resulting increased fiscal cost must be carefully considered.Footnote ²⁸

While our analysis benefits from the fact that we have merged pension system information with individual-specific data on unemployment and job support data, the dataset does not include information on other possible sources of income and savings outside the pension system. For instance, we lack data on the informal labor market and whether this might have taken up the slack for low earnings and the unemployed during the peak of the pandemic. Nevertheless, this seems unlikely in view of labor market surveys during that period (Vergara, Reference Vergara2021; Romero, Reference Romero2022). Additionally, the evidence suggests that the large rise in government social insurance benefits occurred much later than did the pension withdrawals (Central Bank of Chile, 2021).