Salvadoran Pensioners to lose $3K because government pays no interest on Loans

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By LatAm Reports Editor

This is the figure obtained by multiplying the 7 % annual interest of the Transitional Financing Certificates (CFT) for the 4 years in which the Government of El Salvador will not have to contribute to the pension fund. The measure will impact the contributors.

Each Salvadoran worker currently listed for retirement will lose about $3,088 in his individual account due to the grace period agreed by the Government and the Administrators of the Pension Fund (AFP), which grants the State a four-year cycle in which he will not have to pay interest or capital to the pension debt.

That is what can be inferred from the analysis of the reforms approved to the pension system by the Legislative Assembly of New Ideas in December 2022.

Because of these, the newly created Salvadoran Pension Institute (ISP) was to replace the Social Security Investment Certificates (CIPs), the Transfer Certificates (CT) and the Supplementary Transfer Certificates (CTC), in Transitional Financing Certificates (CFTs) under new characteristics that did not specify the Law on the Issue of Certificates of Security Obligations (COP).

READ MORE: Government takes $334 million extra from pension fund

However, on 9 May 2023, the S&P Global Ratings qualifier published a report detailing the conditions agreed between the Government and the AFP for 99 per cent of the Transitional Financing Certificates (CFT). One of those conditions is that they would not have to pay interest or capital for four years. In return, these instruments will have a return of 7 per cent of annual interest within 50 years.

With these numbers, mathematics can be continued to calculate the loss in each worker’s individual account. To that 7 % it must be multiplied for each year that will last the grace period. Therefore, it gives a total of 28 %.

How much is 28 percent of pension debt, which by November 2023 was $9,406.55 million? The result is $2,634 million. This is the figure that the general fund will lose in that cycle without paying capital or interest. Because of that agreement, which for the Government represents a respite to its finances, the capital of all workers will be less valuable in that number.

But the government’s failure to pay for four years could also have an effect on the rest of the country’s economy.

It will have a significant impact on the financing that the AFP has contributed to banks and companies that issue investment certificates; to those that make securitisations (including public companies); which will impact on lower economic growth in the country and lower national savings… will probably have a negative impact on the country’s formal employment and liquidity, raising interest rates, wrote economist Luis Membreño in an opinion column published in May 2023.

A person enters the AFP Grocer facility. / Photo EDH Archive

The individual impact

The latest forecast statistics report published by the Superintendency of the Financial System (SSF) is due April 2023. After that date, the entity did not update the information again, contrary to the law.

Because of this note, this fact will be taken as a reference, the last provided by the Salvadoran State. The number of contributors to an AFP (who contribute to the pension fund and own an individual account) is 852,900.

The total 28 per cent loss of the pension fund must now be divided between that figure, which gives that consolidated $3,088.

According to Patricio Pineda, of the Working Table for a Digna Pensión, a person with an average salary in El Salvador (about $400), with all these reforms, a person can get, in a lifetime of work, an individual account of about $30,000, in the case of men; and about $27,000, in that of women.

In other words, it has lost, due to these 4 years in which the Government will not pay the pension debt, more than 10 per cent of its value. Simply put, if Bukele’s administration hadn’t had this respite, the return on the bill would have been 10 percent higher. In mortal words, when a person retires, he would have got an extra 10 per cent in his pension.

The extra shoe

This is the loss that each worker will have in his or her pension account at the end of (we repeat it for clarity) a lifetime of effort. However, it is not the only decline it will have in its personal fund due to the December 2022 reform.

Have you ever checked your pay ticket on your paycheck what percentage of your salary you are discounted month by month for your pension? Because of these reforms, it is 7.25 per cent. Its employer contributes an extra 8.75 %, so the total is 16 %.

However, only 9 per cent arrives at your individual account. Imagine that you have a salary of $500. Between you and your employer they set aside monthly, therefore, $80. But that’s what he only gets to his personal fund.

The other $35 are distributed as follows: $30 goes to the Solidarity Guarantee Account (CGS), which is used by the government to pay pensions it does not cover; and the other $5 is the pure commission of the AFP for its administrative work.

With the previous pension legislation (adopted in 2017), the direct contribution to the individual account was 11.2 % (between employer and worker they had to give only 8.1 %, the rest of the State corresponded to the budget), so, returning to the example of a person earning a salary of $500, monthly they did not enter the personal fund of each worker $45, but $55.5, 2.1 % extra. Under this legislation, the contribution between employee and employer was 15 per cent of the salary, not the current 16 per cent.

For Patricio Pineda, of the Working Table for a Dignified Pension, the worst part will be taken by those who are now between 30 and 40 years old.

The damage is terrible. As an organization, with these numbers, we believe that a person earning a salary of $1000 will end up receiving a pension of $304.17, which is the minimum. Things only get better for those earning more than $2000, who will be left with about $500. But how many people have a salary of $2000 in this country?, says Pineda.

The AFP, the other big winners of the reform

The profits of the Pension Fund Administrators (AFP) skyrocketed the year just ended, as their commission increased from 0.72 per cent of each contributor’s salary to 1 per cent. This is seen, for example, in its financial reports as of June 2023. Between the two (Trust and Growing), as of June 2022, they reported profits of $8.85 million. For the same month in 2023, the profit was $16.05 million.

That is, they experienced growth in their profits of 181 per cent, almost twice as much as the previous year. The other big winner is the government, because apart from not having to pay the pension fund for 4 years, it has had the possibility to take unlimited funds from it. Hence, as of November 2023, he has withdrawn $1,009.74 since April alone. This money, according to the law, must be used to pay pensions for ISSS and INPEP systems.

This article has been translated from the original which first appeared in El Salvador