The Impact of the COVID-19 pandemic on future pensions in Peru

Abstract

The first case of COVID-19 in Peru was detected on March 5, 2020. On March 15, the Peruvian government declared a state of emergency, which implied the suspension of non-essential work activities in the public and private sectors, mandatory social distancing, and border closures. In the following days, temporary measures to contain the spread of the coronavirus were extended due to the increase in the number of infections. The extension of restrictive measures posed a dilemma for the government in terms of prioritizing between the economy and health. Some could argue that the funds were important to help families cope with income losses, but the SPP affiliates are mostly salaried workers in the formal market with higher educational attainment and job quality better than that of the average worker in the Peruvian labor market. SPP affiliates (particularly those contributing regularly) correspond to the higher level of the distribution of income, so they suffered less economic consequences from the pandemic or had other resources to cope with the shocks. Thus, allowing pension fund withdrawals may not have been a policy that was strictly needed in the Peruvian context. As noted by Bosch et al. (2020), social and labor policies should be prioritized to protect employment and assist families in need, but instruments with other objectives, such as pension savings, should be used as last-resort measures. As this chapter will show, the five pension fund withdrawal policies severely compromised the old-age security of SPP affiliates. On average, the expected pension funds accumulated at retirement age will fall by about 40 percent, although there are significant heterogeneous effects. Congress also attempted to establish a policy to allow the affiliates in the National Pension Scheme (Sistema Nacional de Pensiones - SNP) to cash out past contributions. However, after months of political turmoil, this policy was deemed unconstitutional by the Constitutional Court of Peru. However, this conflict, in a way, caused the government to relax the benefit rules for the SNP in order to facilitate claiming and accessing a pension. As will be explained in this chapter, the new rules will increase access to pensions to about 10 percent of affiliates, which would not have been possible without the relaxation of the eligibility conditions triggered by the decision of Peru’s Constitutional Court.