El Salvador borrows over $1 billion from pension fund

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By LatAm Reports Editor

The Government, through the new Salvadoran Pension Institute (ISP), has accumulated from January to November a new pension debt totalling $1,009.7 million issued under the new figure of Certificates of Security Obligations (COP).

POPs are the new name that the Government has given to the debt papers with which it borrows money from the savings of active contributors and uses them to pay pensions to retirees in the public system (in INPEP and ISSS), minimum pensions and other state-owned social benefits.

In November alone it took $147.1 million from the pension fund, according to data from the Ministry of Finance and the Central Reserve Bank (BCR). And the December data is not yet updated, when retirees receive an additional income as an aguinaldo.

From 2006 to November 2022, governments called them Forecast Investment Certificates (CIP), which were issued under a Security Obligations Trust (FOP) that ended up accumulating a debt of $8.397 million.

But since the pension reform approved in December 2022, the FOP and also the CIPs, which then went on to be called COP, ceased to exist.

In recent years (debt placement) was approaching about $500 million per year. The increase now in part is due to an increase in beneficiaries who processed retirement and the 30 per cent increase to the minimum pension.
Rafael Lemus, Economist.

This debt at COP, coupled with that of the IPCs, has caused the total debt of pensions, that is, what governments have taken from the savings of the workers now add $9.406.5 million.

The total amount is significant given that until April of this year, the accumulated pension fund assets were $13,477 million. That means that 69.8% of all workers’ savings have been paid on loan to the government, either through CIP or through POPs.

The figure accumulated in COP alone is almost double what the Government borrowed in previous years, when it took, on average, amounts close to $500 million per year.

The 2023 General Budget, in fact, estimated a placement of $570 million because, according to economist Rafael Lemus, other transfers were also added to ISSS and IPSFA, the latter, with an insufficient social security fund to pay the military’s high pensions.

According to the December 2022 reform, these POPs have no emission limit, i.e. the government can issue the amount of money it wants each year and the AFP will be obliged to lend it.

Prior to this reform, the limit was 45 per cent of the fund.

Along with this change, the Government also approved in December 2022 that the debt issued at CIP be transferred to another figure called Transitional Financing Certificates (CFT), an operation known as “debt exchange,” of which only risk qualifiers have given some inputs of how this operation was carried out and what the new conditions are.

The little is known is that the government will pay neither capital nor interest on that debt for the next four years, which economists say will affect the individual savings of workers.

Why did the debt go up?

And why is it that the issuance of the POPs is so high this year? Mr Lemus said that in addition to paying the money to current retirees (202,169 old-age, disability and survival) the Government has also issued more debt to fund the 30 per cent increase in the minimum pension approved in December 2022. In addition, it is also because of the reform, people who processed their retirement and there was an increase in new beneficiaries.

Patricio Pineda, founder of the Bureau for a Digna Pension, said the rise in GOP figures is due to the 30 per cent increase given by the government in December. “I had warned of this before,” he said.

However, Pineda adds one more statement: “Why borrow more than $1 billion? Why? Why? Why have they borrowed so much money?” he questioned, stating that according to his calculations, even with the 30% increase in the minimum pension, this year they were only going to need about $675 million.

“At the pace of this (COP ploy), the system is going to collapse in three years,” Pineda said.

I had already warned that they were going to exceed $1,000. Estimates indicate they only needed $675 million. Where does everything else go? At the rate this is going, the pension system is going to collapse in three years.
Patricio Pineda, Founder of the table for a dignified pension.

It says this mainly because the labour market is still stagnant and this does not allow for more contributors to the pension system, but the benefits continue to rise.

According to Fundaungo data from 1998 to 2021, on average only 1 in 4 Salvadoran workers contribute to the pension system and only 40.7% of contributors (2 out of 6) reach the minimum value required to meet retirement conditions and access to a contributory pension,

The Supertrend of the Financial System (SSF), for its part, has stopped publishing, since April, the monthly report of the pension system showing the number of active contributors and the number of retirees either for old age, disability or survival.

This report also showed the fund’s assets since 1998, so it is unknown whether workers’ savings have been reduced in recent months.

There is also no update of the Profitability report that the pension fund has had.

Finance Minister Jerson Posada has not referred to the issue in his latest public interviews either.

69.8% of all workers’ savings have been loaned to the government, either through CIP or through COP.

Why do governments borrow the money from the contributors?

The pension system is private, but almost 70 per cent of that fund has been loaned to the government.

1- Out of stock
The money the government had to use to pay ISSS and INPEP retirees had to come out of reserves, but these ran out in 2002 as the benefits were higher than contributions.

2- Changed Law in 2006
In Antonio Saca’s government, the FOP was approved and the CIPs were created to take money from workers who saved in the AFP and pay the pension to public retirees.

3- Low interest
Since 2009, the government has begun paying low interest on workers’ money as internationally the Libor rate with which the GOP law was linked fell.

4- Long term
In 2017, another reform was made for the government’s pension debt to accumulate until then to move to a term of more than 30 years with five years of grace. The new CIPs would be 50 years in the run.

5- Immediate Benefits
The latest reform in December 2022 allowed the government to take money from unlimited savers to give immediate benefits such as the 30 per cent increase to the minimum pension.

From 2006 to November 2022, governments called them Forecast Investment Certificates (CIP), which were issued under a Security Obligations Trust (FOP) that ended up accumulating a debt of $8.397 million. But since the pension reform approved in December 2022, the FOP and also the CIPs, which then went on to be called COP, ceased to exist.

This article has been translated from the original which first appeared in La Prensa Grafica