## 1chlea2021002 ## Source details **Canonical URL:** [1chlea2021002](https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1chlea2021002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1chlea2021002.pdf.json) --- ### Chile’s pension system: context and system design - Chile replaced a PAYG system with a fully funded pension system based on individual capital accounts managed by private fund managers (AFPs). - Motivations: efficiency, fiscal concerns, and “by a desire to reduce the role of the government in economic affairs” (OECD, 1998). - Early assessments linked the new system with growing private savings and development of local financial markets (Roldos, 2007). - Mandatory contribution rates were set at relatively low levels to encourage participation, yielding low replacement rates relative to initial expectations (Barr and Diamond, 2016). - Informality, self-employment, and low job tenure produced low contribution densities and coverage. ### Key findings on adequacy and trends - System delivers comparatively low replacement rates; parameters did not adapt to changing demographics and global returns. - Without reforms, demographic trends and low global interest rates will continue to reduce replacement rates. - Recent legislation allowing pension savings withdrawals to counter COVID-19 effects is projected to further reduce replacement rates and increase fiscal costs. ### Projected gross replacement rates and drivers - OECD model: Chilean retiring around 2060 projected replacement rate about 30 (percent), 20 percentage points below OECD average. - Altamirano et al. 2018: expected replacement rate for average Chilean worker retiring in 2015 was 38 percent. - Evans and Pienknagura (forthcoming) estimate combined effect of increased life expectancy since 1981 and decline in interest rates reduces expected replacement rate of average current participant to 38 percent from 90 percent. - Drivers of low replacement rates: - Low contribution rates (Chile’s effective contribution rate lower than most OECD countries). - Low contribution density: average monthly probability of contribution 60 percent for males, 50 percent for females. - Average contribution density for retirees 2017–2020: 60 percent for males, 46 percent for females. - Demographics: retirees in 40 years will spread savings over an additional five years for men and four years for women compared to current retirees. - Real interest rates trend: real returns on pension accounts assumed at 4.15% per year; life annuity rate assumed 3.36%. ### COVID-related withdrawals: scope and immediate effects - Two authorized withdrawals (July 2020 and December 2020) reached US$36bn (about 14 percent of GDP) by February 2021. - Close to 10.5 million people withdrew funds up to February 2021; about 30 percent depleted their accounts. - Roughly 95 percent of people with positive balances in June 2020 used at least one withdrawal; over 7 million withdrew twice. - Average amount withdrawn in each round about US$2,000. - Average individual took 40 percent of account balance in first withdrawal and slightly over 30 percent in second withdrawal. - Close to 3 million people depleted their accounts up to February 2021. - Withdrawal rules (summary): - 1st Withdrawal: up to 10%; maximum US$ 5,593 (150 UF as of 23-Jul); minimum US$ 1,305 (35 UF as of 23-Jul); tax exempt: Yes. - 2nd Withdrawal: up to 10%; maximum US$ 5,769 (150 UF as of 3-Dec); minimum US$ 1,346 (35 UF as of 3-Dec); tax exempt: Conditional (earn < US$1,986 a month / $1.5 MM as of 3-Dec: exempt; earn > US$1,986 a month: not exempt). ### Impacts of withdrawals on projected pensions and replacement rates - Projected average decline in self-funded portion of pensions: 16 percent for current affiliates (average). - Average withdrawal projected to result in a 5 percent decline in pension at retirement for current affiliates. - Average expected replacement rate declines from 37 percent to 35 percent after accounting for solidarity pillar adjustments. - Projected declines in self-funded pensions by gender: - Men: projected to decline on average by 15 percent. - Women: projected to decline on average by almost 20 percent. - Age/cohort effects: - Males in their 20s: reductions in self-funded pensions of 5 to 10 percent after withdrawals. - Older cohorts: reductions up to over 53 percent for elderly with lower balances who withdrew proportionally more. - Replacement rate impacts: - Replacement rates projected to decline by close to 2.5 percentage points after withdrawals for the average male worker, and by over one percentage points for female workers. - In absence of additional government support, replacement rates would fall by over 3 percentage points for men and by over 1.5 percentage points for women. ### Solidarity pillar (APS/PBS): role and fiscal impact - Solidarity pillar sets a pension floor for bottom 60 percent of income distribution; substantially raises replacement rates for low-income pensioners. - Before 2020 withdrawals, solidarity pillar projected to account for approximately 30 percent of total expected pensions at retirement for the average male retiree and 50 percent for the average woman. - Solidarity pillar increases expected average replacement rate for 2020 contributors by almost 15 percentage points for men and close to 20 percentage points for women. - Buffering role of solidarity pillar in response to withdrawals estimated to produce additional fiscal cost with net present value of over 3.5 percent of GDP in 2020. - Withdrawals could increase number of recipients and amounts received; additional fiscal costs expected to peak in 2060 between 0.06 and 0.12 percent of GDP depending on assumptions. - Increasing profile of additional fiscal costs equivalent, in net present value, to a one-off fiscal cost between 2 and 3.5 percent of GDP in 2020. - Prior to withdrawals, projected fiscal costs of solidarity pillar expected to increase to 1.6 percent of GDP by 2060 under unchanged PBS and APS parameters. - Alternative scenario: if PBS and APS grow at same rate as wages (1.25 percent per year real), fiscal costs can reach 3 percent of GDP in 2060. ### Fiscal and tax revenue effects from withdrawals - Under baseline, close to 230,000 additional people projected to receive self-funded pensions below PMAS at retirement and become eligible to APS; under alternative scenario, 160,000 additional people projected. - Expected increase in average supplement received: - Males: 8 percent (7.3 percent in alternative scenario). - Females: 5 percent (3.6 percent in alternative scenario). - Peak additional payments around 2060: close to 0.1 percent of GDP (0.12 percent in alternative scenario). - Net present value of additional fiscal costs: over 3.5 percent of 2020 GDP (upper-bound); if income distribution unaffected, peak at about 0.06 percent of GDP and NPV 2 percent of 2020 GDP. - Tax revenue effects: - Assuming income tax structure unchanged, government would lose over USD 1 billion over 40 years (NPV 2020 terms). - Foregone revenue would peak around 2060 at approximately 0.006 percent of GDP. - If the two withdrawals had been fully taxable, tax collection in 2021 would have increased by over USD 1 billion, or 0.45 percent of GDP. ### Reform scenarios and simulated outcomes - Example combined reform (illustrative, immediate implementation assumed): - Increase contribution rate to 16 percent. - Raise retirement age for men and women to 67. - Improve contribution density to 70 percent. - Result: average expected replacement rate rises to 50 percent from 35 percent for the average worker. - For young cohorts (age 20–25): expected replacement rates rise to 70 percent for males and close to 60 percent for females (in one example); in another combined example expected replacement rates for young cohorts reach 66 for men and 59 for women. - Combined reform reduces required solidarity support, lowering fiscal cost of pension system by 0.8 percent of GDP in 2060. - Isoquant analysis examples: - Population average 40 percent replacement rate reachable by raising female retirement age to 65 and contribution rate to 13.5 percent, or by keeping contribution rate and raising retirement age to 69. - For 20–25 cohort: 70 percent replacement rate reachable with contribution rate 18 percent and retirement age 70; if contribution density increases to 70 percent, same 70 percent replacement rate reachable with retirement age 67. - Isolated policy impacts (model results): - Increasing mandatory contribution from 10 to 13 percent: average expected replacement rate increases from 35 to 38 percent. - For age 20–25 males: from 37 to 45 percent. - For age 20–25 females: from 29 to 33 percent. - Increasing contribution rate from 10 to 16 percent: - Age 20–25 expected replacement rate increases from 34 to 45 percent. - Population average increases from 35 to 41 percent. - Increasing contribution density to 70 percent: - Expected replacement rate for current affiliates from 35 to 37 percent. - Age 20–25 from 34 to 38 percent. - Raising retirement age to 67 increases expected average replacement rate by 3 percentage points (from 35 percent to 38 percent). - Notes and caveats: - Contribution density is not a direct policy variable; requires labor market and structural policies to increase formal employment and tenure. - Model assumes real wage growth of 1.25 percent per year, real returns 4.15% per year, life annuity rate 3.36%. - Reforms may need phasing-in to address political economy considerations. ### Universal Basic Pension (UBP) scenarios and fiscal costs - A UBP for eligible pension age (65+ males, 60+ females) would cost between 2.5 and 6 percent of GDP by 2050 (5 to 10 percent of today’s GDP), depending on parameters. - Four UBP scenarios considered: 1. UBP set today at half real minimum wage and remains constant in real terms. 2. UBP set at 75 percent of today’s real minimum wage and remains constant in real terms. 3. UBP set at 50 percent of the real minimum wage and then grows at same rate as overall wages. 4. UBP set today at 75 percent of the minimum wage and then grows at same rate as wages. - Fiscal cost examples: - UBP of half the minimum wage (5.6 UF or about US$230) ≈ 2.5 percent of GDP each year; close to 5 percent of GDP in 2050 due to demographics and dynamics. - If UBP assumed to increase with wages, cost of UBP of half the minimum wage increases to over 3.5 percent of GDP by 2050 (close to 8 percent of today’s GDP). - Pension of 75 percent of today’s real minimum wage: - Cost 3.9 percent of GDP by 2050 assuming zero real growth of pension. - Cost 5.6 percent of GDP by 2050 assuming real growth of pension 1.25 percent (8 percent and over 10 percent of GDP in 2020, respectively). ### Institutional and procedural recommendations - Establish periodic review process to adapt key parameters to life expectancy, global returns, and labor market changes. - Suggest developing automated updates at regular intervals (five or 10 years). - The recent reform proposal asking the Social Security Advisory Council to review trends every three years cited as a step forward. - Use fiscal space from strengthening self-funded portion to target solidarity component more effectively. --- ### Tax structure, compliance, and revenue policy (selected findings) - Tax revenues excluding SSC increased by four percentage points since 1990 to about 19 percent in 2017. - Chile’s tax ratio lies between averages of upper-middle and high-income countries. - Chile relies relatively more on indirect taxes; VAT contributes 45 percent of total tax revenue. - PIT collects less than 2 percent of GDP in Chile versus 8 percent average in EU and OECD. - PIT contributes 10 percent of total tax revenue in Chile versus 32 percent in OECD countries. - Sum of PIT and CIT revenue in Chile: 6 percent of GDP; OECD average: 11 percent of GDP. - PIT coverage: in 2019 only 2.7 out of 10.7 million registered individual taxpayers had income above tax-exempt threshold (13.5 UTA, about US$11,400); 74 percent of individuals were tax exempt in 2019. - PIT tax expenditures estimated at 1.2 percent of GDP (SII, 2019a), reduced to 0.9 percent excluding deferred tax on undistributed profits (IMF/OECD, 2020). - VAT compliance gap (Ueda, 2017): 19 percent of potential revenue in 2015, representing 1.9 percent of GDP. - CIT compliance gap estimates uncertain; adjusted range suggests revenue loss 0.8 percent of GDP; high estimate implies 1.3 percent of GDP loss. ### Policy recommendations on taxation - Increase PIT revenue by: - Reducing exemptions and deductions benefiting high-income taxpayers. - Adjusting tax-exempt threshold and bracket structure; consider lowering thresholds and increasing middle rates. - Evaluate effective PIT rates per bracket accounting for credits, deductions, and non-reported income before implementing changes. - Reexamine special CIT regimes (cooperatives, Free Trade Zones, renta presunta) and tax expenditures. - Reassess VAT exemptions (professional services) and construction VAT credit (65 percent credit) to improve horizontal equity and reduce evasion. - Gradually increase fuel excises (diesel) and bring excise into VAT base; diesel excise issues amount to about 0.55 percent of GDP in credits and 0.15 percent of GDP lost by excluding excise from VAT base. - Raise green taxes progressively; current CO2 tax rate US$5 per ton, far below levels cited for COP21 targets (US$75 per ton). ### Recent 2020 tax reform and expected impact - Main elements: unified semi-integrated CIT at 27 percent, simplified SME regime (25 percent) with full integration, higher top PIT marginal rate at 40 percent, VAT on non-resident digital services, digital sales receipts. - Expected to gradually raise tax revenues by about 1 ppt of GDP in the medium term; not expected to fundamentally change reliance on PIT vs other taxes. --- ### Episodes of market stress: social unrest (Oct–Nov 2019) and COVID-19 (2020) - Social unrest beginning October 18, 2019: - Human and physical impact: over 30 deaths, over 2,500 injured security officers, over 10,000 detained persons, hundreds of looted stores and vandalized buildings. - Exchange rate intraday volatility peaked at 4.15 percent on November 12, 2019; average intraday volatility over past decade 0.74 percent. - Onshore US$ spread rose from about 100 bps on November 12 to about 330 bps a week later. - Domestic investors sold long-term fixed-income and shifted to short-term liquid assets and FX, causing liquidity shortages and higher long-term rates. - BCCh interventions late-2019: - Offered FX swaps (30-day and 90-day) up to US$4 billion over two months; peak outstanding swaps US$1.1 billion. - Opened 30-day repo window, suspended issuance of new central bank paper, initiated buyback of BCCh securities, expanded repo collateral. - Announced spot and forward interventions up to US$10 billion in each market (first week offering US$200 million per day). - Effects: restored market functioning, reduced depreciation expectations, yields decreased, credit spreads compressed, yield curve flattened. - COVID-19 episode (March–June 2020) and BCCh response: - Extended FX intervention window to January 9, 2021; extended swaps maturities to 90 and 180 days. - Policy rate cuts: March 16, 2020 cut by 75 bps; March 31, 2020 cut by 50 bps to 0.5 percent (BCCh effective lower bound). - Introduced funding-for-lending programs (FCIC1, FCIC2, FCIC3) with potential total reach up to about US$40 billion. - Asset purchase programs and bank-bond purchases: up to US$8 billion in second asset purchase program; buybacks of BCCh securities. - Effects: provided liquidity, supported credit flow, yields and spreads decreased from March–April peaks; FX swaps peaked mid-April at about US$1.2 billion then declined to zero by late June. - Bonds and Treasury actions: - Non-resident share in government securities fell from about 18 to 13 percent between March and May 2020. - Treasury issued US$1.46 billion in US$ denominated bonds at 2.45% on May 5, 2020; domestic issues included US$3.7 billion bonds with average maturity 2023 and US$1.4 billion inflation-linked bonds with average maturity 2021. - Overall assessment: - Late-2019 interventions effective under extreme circumstances; announcement and scale restored confidence. - During global Covid-19 shock BCCh used liquidity provision, credit support, and asset purchases rather than spot FX interventions; combined with favorable global developments these measures helped restore market functioning. --- ### Financial sector, credit, and household/corporate exposure - Total credit-to-GDP ratio reached 171.2 percent in 2020Q2; OECD average 176.5 percent. - Nominal credit growth to private non-financial sector rose from 3.0 percent in 2018Q1 to 17.8 percent in 2020Q2 while nominal GDP growth fell from 7.2 to 1.6. - Loan growth from banking sector fell from 8.4 percent in March 2020 to -0.6 percent in January 2021; consumer loans contracted sharply. - Non-performing loan ratio 1.6 percent as of December 2020. - As of July 31, about 38 percent of mortgage loan portfolio had extensions, 19 percent of consumer loans, and 37 percent of commercial loans. - Capital adequacy ratio reached 14.3 percent in October 2020. - Liquidity coverage ratios above regulatory limits (70%). - Household exposure: - Consumer loans fell by -17.0 percent in January 2021 from expansion of 5.2 percent in September 2019. - Two pension fund withdrawals amounting to 14 percent of GDP (USD 36 bn) accompanied by direct transfers helped households pay past-due debts; about 600,000 people exited delinquent listings in 2020H2. - Corporate exposure: - Real commercial loan growth fell from 9.9 percent in April 2020 to 3.0 percent in January 2021. - FOGAPE-COVID and central bank measures compensated declines by a total of 9.1 trillion Chilean pesos as of December 2020. - Risks: - Pockets of stress could emerge as policy measures expire; household debt to disposable income ratio 76.4 percent in 2020Q3. - Banks increased provisions (>1.6 times NPL) and raised liquid asset ratios to 20.5 percent as of Sep. 2020. - Central Bank stress test indicates banking system well capitalized even in stressed scenario. - Recommendations: continue vigilant monitoring and supervision as temporary measures unwind. --- ### Poverty, inequality, and microsimulation of social protection measures - Microsimulation inputs: CASEN 2017 updated to 2019, Labor Force Survey 2019–2020, World Bank macro projections. - Main assumptions: - Wage losses: salaried workers 30 percent, non-salaried workers 50 percent. - Pass-through rate of GDP to household income: 80 percent. - Exclusion error for targeting: 10 percent. - Key outcomes (COVID-19 + mitigation): - International poverty (US$5.5 per day 2011 PPP): 2019 = 3.3 percent; 2020e = 3.3 percent (mitigation kept it stable). - National poverty (equivalized income): 2019 = 8.1 percent; 2020e = 12.2 percent (increase of 4.1 percentage points). - Job losses in 2020: -1,060,915 (total). - Female-headed household impacts: with mitigation, international poverty 4.0 percent and national poverty 14.2 percent; without mitigation would have risen to 9.9 and 21.6 percent respectively. - Vulnerable population (US$5.5–US$13): increased from 27.8 to 39.2 percent. - Middle-class (US$13–US$70): contracted from 63.3 to 53.3 percent. - Nearly 2.8 million people (~15 percent of population) experienced downward mobility. - Role of social protection: - Emergency Family Income (IFE) offset 71 percent of total increase in international poverty and 38 percent of increase in national poverty. - Minimum Wage Guarantee (IMG) offset 27 percent of international poverty increase and 23 percent of national poverty increase. - Employment Protection Law offset 15 percent (international) and 10 percent (national). - Sensitivity analysis: - Low wage loss scenario (10% salaried / 25% non-salaried): national poverty 10.1 percent; international poverty 2.8 percent. - High wage loss scenario (50% salaried / 75% non-salaried): national poverty 15.0 percent; international poverty 4.4 percent. - Pass-through 100% lowers projected national poverty in 2021–2023 relative to 80% assumption. ### Appendix II — selected policy measures (cash amounts in CLP) - COVID Benefit (Bono COVID): $50,000 CLP per eligible household member for listed beneficiary categories. - Employment Protection Law: unemployment insurance first payment 70 percent of average monthly gross salary (last 3 months), then 55 percent until individual account exhausted; Solidarity fund covers limited remaining payments. - Emergency Family Income (IFE): tabled amounts by household size; first month e.g., 1-person $65,000 CLP, 2-person $130,000 CLP, up to 10+ $494,000 CLP; subsequent payments higher (e.g., second–fourth payment 1-person $100,000 CLP). - Middle-Class Benefit: one-off between $100,000 and $500,000 CLP depending on pre-pandemic wage; bracket [$400,000 - $1,500,000] → $500,000 CLP. - Minimum Wage Guarantee: targeted to full-time workers to reach net salary equal to $300,000 CLP; eligibility based on gross wage threshold $384,363 CLP and Household Social Registry criteria. *This summary is based on "CHILE’S PENSION SYSTEM IN THE AFTERMATH OF COVID-19: IMPACT AND REFORM OPTIONS" and related chapter content in 1chlea2021002.* ### 1. Projected Gross Replacement Rates in OECD Countries and Selected Comparators ### 1. Projected Gross Replacement Rates in OECD Countries and Selected Comparators in 2060 ### Context and system design - Chile was the first country to replace a traditional pay-as-go (PAYG) system with a fully funded pension system based on individual capital accounts managed by private fund managers (AFPs). - The switch was motivated by efficiency and fiscal concerns, and “by a desire to reduce the role of the government in economic affairs” (OECD, 1998). - Early assessments linked the new pensions system with growing private savings and with the development of local financial markets (Roldos, 2007). - To encourage participation in the new system, mandatory contribution rates were set at relatively low levels, which resulted in low replacement rates relative to initial expectations at the time of the transition and by international standards (Barr and Diamond, 2016). - Informality and self-employment, together with low job tenure, resulted in relatively low contribution densities and coverage. ### Key findings on adequacy and trends - The system is now delivering comparatively low replacement rates, as its parameters did not adapt over time to changing demographics and global returns, while informality persists in the labor market. - In the absence of reforms, the system’s inability to deliver adequate outcomes for a large share of participants will continue to magnify, as demographic trends and low global interest rates will continue to reduce replacement rates. - Recent legislation allowing for pension savings withdrawals, to counter the effects from the COVID-19 pandemic, is projected to further reduce replacement rates and increase fiscal costs. ### Projected impacts and risks - Demographic trends and low global interest rates are expected to continue reducing replacement rates absent reform. - Pension savings withdrawals enacted during the COVID-19 pandemic will further lower projected replacement rates and raise fiscal costs. ### Policy implications and reform directions - A substantial improvement in replacement rates is feasible via a reform that: - raises contribution rates; - raises the retirement age; - implements policies that increase workers’ contribution density. - Reforms should address low mandatory contribution rates set initially, low contribution density due to informality and self-employment, and adjustments for changing demographics and global returns. _This summary is based on "CHILE’S PENSION SYSTEM IN THE AFTERMATH OF COVID-19: IMPACT AND REFORM OPTIONS" (April 2, 2021)._ ### introduction of the solidarity pillar in 2008, marked the beginning of a reform agenda aimed at ### 1chlea2021002 - introduction of the solidarity pillar in 2008, marked the beginning of a reform agenda aimed at ### Background and reform agenda - The introduction of the solidarity pillar in 2008 marked the beginning of a reform agenda aimed at improving the system’s fairness and overall functioning, which continues to this day, as witnessed by the 50 percent increase in the minimum pension introduced in December 2019. - Demographic trends and low global returns are expected to weaken the system’s ability to yield adequate pensions and prompted the last two administrations to propose reforms to increase contribution rates. - Extraordinary COVID-19 measures in 2020 allowed individuals to withdraw funds from their pension account balances, adding to system challenges. ### COVID-related withdrawals: scope and immediate effects - Withdrawals amounted to 14 percent of GDP (by end-2020). - About 30 percent of individuals who withdrew funds depleted their pension accounts (as of February 2021). - The average withdrawal for current affiliates is projected to result in a 5 percent decline in pension at retirement. - The two rounds of withdrawals are expected to reduce the self-financed portion of pensions of current affiliates by 16 percent, on average (i.e. in the absence of any compensating government support). - The reduction in self-funded pensions triggers an increase in the government-funded pension supplement, resulting in a reduction in total pensions of about 5 percent and a decline in the average expected replacement rate, from 37 percent to 35 percent. ### Role and fiscal impact of the solidarity pillar (APS) - The solidarity pillar sets a pension floor for those in the bottom 60 percent of the income distribution and significantly raises replacement rates for low-income pensioners. - Benefits from the solidarity pillar (before the 2020 pension withdrawals) were projected to account for approximately 30 percent of total expected pensions at retirement for the average male retiree and 50 percent for the average woman. - The solidarity pillar increases the expected average replacement rate for those who contributed to the pension system in 2020 by almost 15 percentage points for men, and by close to 20 percentage points for women. - The buffering role of the solidarity pillar in response to withdrawals is estimated to produce an additional fiscal cost with a net present value of over 3.5 percent of GDP in 2020. - The withdrawals could increase the number of recipients of the pension supplement and the amount received by each recipient, leading to gradually rising additional fiscal costs that are expected to peak in 2060 between 0.06 and 0.12 percent of GDP depending on assumptions. - The increasing profile of additional fiscal costs would be equivalent, in net present value, to a one-off fiscal cost of between 2 and 3.5 percent of GDP in 2020. - Future increases in solidarity contributions would raise these fiscal costs further. ### Drivers of low replacement rates - Low contribution rates: Chile’s effective contribution rate is lower than most OECD countries. - Low contribution density: Self-employment and worker turnover have resulted in low contribution densities over workers’ careers, especially among women. - The average probability that a male worker contributes to his pension account in a given month is 60 percent, compared to 50 percent for women. - The average contribution density for males retiring between 2017 and 2020 was 60 percent and 46 percent for females. - Demographics: Increasing life expectancy means younger cohorts will spread savings over more years (e.g., retirees in 40 years will have to spread savings over an additional five years for men and four years for women compared to current retirees). - Lower future expected returns on savings: Real interest rates have gradually declined since the adoption of the defined contribution system and are expected to remain low over the medium term. ### Historical and comparative context - Altamirano et al. 2018: expected replacement rate for an average Chilean worker retiring in 2015 was 38 percent (lower than the average LAC country). - OECD’s pension model projects a Chilean retiring around 2060 would have a replacement rate of about 30 (percent), which is 20 percentage points below the OECD average. - Evans and Pienknagura (forthcoming) estimate that the combined effect of increased life expectancy from 1981 levels and the decline in interest rates from 1981 until today reduces the expected replacement rate of the average person currently in the system to 38 percent from 90 percent (illustrating how initial parameters did not adjust to secular changes). ### Projections and reform scenarios - Withdrawals’ projected impacts: - Average withdrawal → 5 percent decline in pension at retirement for current affiliates. - Self-financed portion reduction → 16 percent on average. - Average expected replacement rate falls from 37 percent to 35 percent after accounting for solidarity pillar adjustments. - Reform package example (combined measures): - Increase contribution rate to 16 percent. - Raise retirement age for men and women to 67. - Improve contribution density to 70 percent. - Result: average expected replacement rate rises to 50 percent from 35 percent for the average worker. - For young cohorts: expected replacement rates would increase to 70 percent for males aged 20-25 and close to 60 percent for females aged 20-25. - Impacts by parameter: - Increases in contribution rates and contribution density have large positive effects on expected replacement rates of younger cohorts, while leaving older cohorts virtually unchanged. - Increases in retirement age yield non-negligible improvements in expected replacement rates for all cohorts. - Periodic revisions to key parameters to reflect changes in life expectancy and global financial conditions would improve system resiliency. - Reforms may need to be phased-in to address political economy considerations. ### Organization of the paper (as provided) - Section B: state of the pension system under current legislation prior to the withdrawals and benchmarking relative to Latin American and OECD peers; projections pre-withdrawals using data from the pension supervisory agency. - Section C: description of the withdrawals and quantification of their impact on expected replacement rates and fiscal costs. - Section D: impact of different pension reform avenues on expected replacement rates and expected fiscal costs taking into account the effect of withdrawals. - Section E: conclusions. *Source: 1chlea2021002 - introduction of the solidarity pillar in 2008, marked the beginning of a reform agenda aimed at — https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021002.pdf* ### 1.1 percent stem from the solidarity pillar. Total fiscal costs will converge to the costs of the ### 1chlea2021002 - 1.1 percent stem from the solidarity pillar. Total fiscal costs will converge to the costs of the ### Fiscal costs and the solidarity pillar - Prior to withdrawals, projected fiscal costs of the solidarity pillar were expected to increase gradually to 1.6 percent of GDP by 2060, assuming the parameters related to PBS and APS remain unchanged. - Alternative scenario: if PBS and APS are assumed to grow at the same rate as wages (1.25 percent per year in real terms), fiscal costs can be expected to reach 3 percent of GDP in 2060. - Fiscal costs reflect the authorities’ projections of future costs associated with the old PAYG system up to 2050. ### Pension withdrawals (policy response and aggregate amounts) - Congress authorized two rounds of withdrawals, in July 2020 and December 2020, to mitigate the adverse economic effects of COVID-19. - Total withdrawals reached US$36bn (or about 14 percent of GDP) by February 2021. - The allowed amount for each withdrawal was generally 10 percent, but minimum and maximum withdrawals of 35 UF and 150 UF respectively meant the share of assets that could be withdrawn varied with balances. - The first withdrawal was tax-exempt; the second was exempt only for those who earned on average below a certain threshold. ### Participation, depletion, and amounts withdrawn - Close to 10.5 million people withdrew money from their pension accounts up to February 2021. - Of those, 30 percent depleted their accounts. - Roughly 95 percent of all people with positive pension balances in June 2020 made use of at least one withdrawal; over 7 million people withdrew twice. - The average amount withdrawn in each round was about US$2,000. - The average individual took 40 percent of their account balance in the first withdrawal and slightly over 30 percent in the second withdrawal. - Close to 3 million people depleted their accounts up to February. ### Withdrawal rules and thresholds (as implemented) - 1st Withdrawal: - Up to 10% of funds allowed. - Maximum amount: US$ 5,593 (150 UF as of 23-Jul). - Minimum amount: US$ 1,305 (35 UF as of 23-Jul). - Legal status: Constitutional reform. - Date of Publication: 30-Jul-20. - Tax exempt: Yes. - 2nd Withdrawal: - Up to 10% of funds allowed. - Maximum amount: US$ 5,769 (150 UF as of 3-Dec). - Minimum amount: US$ 1,346 (35 UF as of 3-Dec). - Legal status: Law. - Date of Publication: 10-Dec-20. - Tax exempt: Conditional (earn < US$1,986 a month / $1.5 MM as of 3-Dec: exempt; earn > US$1,986 a month: not exempt). ### Distribution of withdrawals by pre-withdrawal balance (amounts as of announcement dates) - First withdrawal (as of July 23, 2020; amounts in US$): - Less than $1,305: Allowed withdrawal 100% of balance; Mean amount withdrawn $527; Mean (% of balance) 100%; People 2,120,496; 20.5%. - Between $1,305 - $13,050: Allowed withdrawal $1,305: >10% of balance; Mean amount withdrawn $1,307; Mean (% of balance) 35.5%; People 4,427,410; 42.9%. - Between $13,050 - $55,928: Allowed withdrawal 10% of balance; Mean amount withdrawn $2,716; Mean (% of balance) 10.0%; People 3,058,099; 29.6%. - More than $55,928: Allowed withdrawal $5,593: <10% of balance; Mean amount withdrawn $5,549; Mean (% of balance) 6.2%; People 666,369; 6.5%. - No information: People 54,298; 0.5%. - Total: Mean $1,842; Mean (% of balance) 39.3%; People 10,326,672; 100%. - Second withdrawal (as of December 3, 2020; amounts in US$): - Less than $1,346: Allowed withdrawal 100% of balance; Mean amount withdrawn $571; Mean (% of balance) 100%; People 1,005,815; 14.1%. - Between $1,346 - $13,461: Allowed withdrawal $1,346: >10% of balance; Mean amount withdrawn $1,348; Mean (% of balance) 33.2%; People 3,260,178; 45.7%. - Between $13,461 - $57,690: Allowed withdrawal 10% of balance; Mean amount withdrawn $2,693; Mean (% of balance) 10.0%; People 2,457,057; 34.4%. - More than $57,690: Allowed withdrawal $5,769: <10% of balance; Mean amount withdrawn $5,727; Mean (% of balance) 6.4%; People 379,277; 5.3%. - No information: People 37,625; 0.5%. - Total: Mean $1,940; Mean (% of balance) 33.2%; People 7,139,952; 100.0%. ### Impact on account balance distribution and projected pensions - The distribution of pension accounts shifted left after withdrawals: significant reduction in number of people with intermediate balances and a large increase in individuals with low balances. - Projected average decline in self-funded portion of pensions: - Men: projected to decline on average by 15 percent. - Women: projected to decline on average by almost 20 percent. - Age/cohort effects: - Males in their 20s: projected reductions in self-funded pensions of 5 to 10 percent after withdrawals. - Older cohorts: reductions that can go up to over 53 percent, with higher numbers for elderly with lower balances who withdrew proportionally more. - Women exhibit a similar pattern with larger reductions due to lower wages, lower contribution densities, and a lower mandatory retirement age. - The reduction in self-funded pensions is smaller when weighted by assets because the share of individual assets withdrawn declined with account balance and a large share of the population has low pension balances. ### Factors affecting individual long-term pension impact - Larger withdrawals → larger reductions in retirement pensions (through impact on account balances). - Longer time to rebuild assets → smaller impact of withdrawals on pensions. - Individuals with low wages withdrew proportionally more → slower ability to replenish balances. - Individuals for whom self-funded pensions were a relatively small component of total pensions (relying more on public solidarity contribution) are expected to see smaller decreases in pensions. - Post-withdrawal balances affect APS eligibility and the value of the APS supplement an individual will receive. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021002.pdf* ### 22. The projected reductions in self-funded pensions are expected to increase public costs ### 22. The projected reductions in self-funded pensions are expected to increase public costs ### Impact on Replacement Rates - Replacement rates are projected to decline by close to 2.5 percentage points after withdrawals for the average male worker, and by over one percentage points for female workers. - In absence of additional government support, replacement rates would fall by over 3 percentage points for men and by over 1.5 percentage points for women. - The smaller impact on women’s expected replacement rates is attributed to PBS and APS accounts comprising a large share of their pension, making pensions less sensitive to self-funded account balances. - For men, the mitigating effect of government support is largest for the 50-55 age group—APS dampens the adverse effect of withdrawals on expected replacement rate by 1 percentage point. - For women, the additional impact of APS is largest for the 40-45 age group. ### Fiscal Costs and Solidarity Pillar - Under the baseline scenario, close to 230,000 additional people are projected to receive self-funded pensions below PMAS at retirement, making them eligible to APS after the withdrawals if they fall into the lower 60 percent of the income distribution. - Under the alternative scenario, 160,000 additional people are projected (Figure 10). - Current recipients are expected to see an increase in APS due to the adverse effect of withdrawals on the self-funded portion of pensions. - Expected increase in the average supplement received: - Males: 8 percent (7.3 percent in the alternative scenario). - Females: 5 percent (3.6 percent in the alternative scenario). - Additional fiscal costs from the solidarity pillar: - Peak around 2060 with additional payments of close to 0.1 percent of GDP (0.12 percent in the alternative scenario). - Net present value of the additional fiscal costs stands at over 3.5 percent of 2020 GDP. - Upper-bound caveat: These fiscal costs represent an upper bound because some individuals falling below PMAS may not fall into the lower 60 percent of the income distribution and thus may not be eligible for solidarity benefits. - If withdrawals do not affect the income distribution (beneficiaries unchanged), fiscal cost would peak at about 0.06 percent of GDP under the baseline, and net present value would be 2 percent of GDP in 2020. - The analysis does not assess fiscal cost derived from withdrawals by current pensioners, who represent about 5 percent of the population that withdrew funds. ### Tax Revenue Effects - Self-funded pensions in Chile are taxable; reductions in self-funded pensions are expected to lower future tax collection. - Under the assumption that the structure of income tax remains constant over the next 40 years, the government would lose over USD 1 billion dollars over 40 years, expressed in net present value 2020 terms. - Foregone revenue would peak around 2060 at approximately 0.006 percent of GDP. - Alternative quantification: if the two withdrawals would have been fully taxable, tax collection in 2021 would have increased by over USD 1 billion, or 0.45 percent of GDP. ### Reform Options and Simulations - Long-run pressures: less favorable global financial conditions, aging population (eligible pension population expected to double from about 3 million in 2021 to 6 million in 2050), and low contribution rates strain the system and solidarity pillar. - Proposed March 2021 reform (President Piñera) aims to increase contribution rate to 16 percent, expand the coverage of the solidarity pillar, and add more competition: - Additional 6 percent contribution rate to be paid by the employer and managed by a public autonomous body. - Half (3 percent) goes to employees’ individual pension savings; half to a collective saving fund. - Collective saving fund earnings used to incentivize contribution as years of contribution rise. - Reform aims to increase solidarity pillar coverage from 60 percent to 80 percent of the population. - Reform exercise assumptions: immediate implementation of reforms (results are upper bounds; phased implementation may be needed in practice). ### Effects of Specific Reforms on Replacement Rates and Fiscal Cost - Isoquant analysis: combinations of contribution rate, retirement age, and contribution density can target given population average expected replacement rates. - Example: a population average 40 percent expected replacement rate can be achieved by increasing female retirement age to 65 and contribution rate to 13.5 percent, or by keeping current contribution rate and raising retirement age to 69. - Raising contribution density from 60 (males) and 50 (females) to 70 percent eases required increases in contribution rate and retirement age. - For 20–25 cohort: an expected replacement rate of 70 percent can be reached with contribution rate 18 percent and retirement age 70; if contribution density increases to 70 percent, same 70 percent replacement rate can be reached with retirement age 67. - Increasing mandatory contribution from 10 to 13 percent: - Increases average expected replacement rate from 35 to 38 percent. - For young affiliates (age 20–25): - Males: from 37 to 45 percent. - Females: from 29 to 33 percent. - Lowers support needed from government and thus reduces fiscal cost of the system (analysis does not account for additional fiscal costs for government as employer). - Even with increase to 13 percent, youngest cohorts would not reach the OECD average replacement rate of 50 percent. - Combined reform (example): increase contribution rate to 16 percent, retirement age to 67 (from 65 for men and 60 for women), and contribution density to 70 percent (from 60 for men and 50 for women): - Expected replacement rate for young cohorts: 59 for women and 66 for men. - Expected replacement rate for average current contributor would reach 50 percent. - Combination reduces required solidarity support, lowering fiscal cost of the pension system by 0.8 percent of GDP in 2060. - Fiscal space could be used to strengthen the solidarity component in a targeted way. - Gender inequalities in replacement rates would persist due to differences in life expectancy and current accumulated assets. - Isolated policy impacts: - Increasing contribution rate from 10 to 16 percent has the largest impact for current affiliates and younger cohorts: expected replacement rate for age 20–25 increases from 34 to 45 percent; population average increases from 35 to 41 percent. - Increasing contribution density to 70 percent raises expected replacement rate for current affiliates from 35 to 37 percent, and for age 20–25 from 34 to 38 percent. - Raising retirement age to 67 increases the expected average replacement rate by 3 percentage points (from 35 percent to 38 percent) in the model. - Model assumption: increase in real wage assumed at 1.25 percent, which dampens replacement rate response because pensions and final wage both increase. ### Universal Basic Pension (UBP) Scenarios and Costs - A universal basic pension providing a fraction of the minimum wage to everyone of eligible pension age (65+ males, 60+ females) would cost between 2.5 and 6 percent of GDP by 2050 (5 to 10 percent of today’s GDP), depending on parameters. - Four UBP scenarios considered: 1. UBP set today at half real minimum wage and remains constant in real terms. 2. UBP set at 75 percent of today’s real minimum wage and remains constant in real terms. 3. UBP set at 50 percent of the real minimum wage and then grows at the same rate as overall wages. 4. UBP set today at 75 percent of the minimum wage and then grows at the same rate as wages. - Comparison: a UBP of half the minimum wage is roughly equivalent to paying today’s PBS to every retiree (a pension level that falls slightly below the poverty line). - Fiscal cost example: - A UBP of half the minimum wage, 5.6 UF or about US$230, would be approximately 2.5 percent of GDP each year. - This would amount to close to 5 percent of GDP in 2050 due to demographics and relative dynamics of minimum pension and GDP per capita. *Source: IMF chapter text and authors’ calculations in the provided content.* ### 2020. If the basic pension is assumed to increase with wages, the cost of a UBP of half the minimum ### 1chlea2021002 - 2020. If the basic pension is assumed to increase with wages, the cost of a UBP of half the minimum ### Universal Basic Pension (UBP) cost projections - If the basic pension is assumed to increase with wages, the cost of a UBP of half the minimum wage would increase to over 3.5 percent of GDP by 2050 (close to 8 percent of today’s GDP). - A pension of 75 percent of today’s real the minimum wage, which is above the poverty line: - will create a fiscal cost of 3.9 percent of GDP by 2050 assuming zero growth of pension, - and 5.6 percent of GDP by 2050 if we assume a real growth of the pension of 1.25 percent (8 percent and over 10 percent of GDP in 2020, respectively). ### Impact of pension withdrawals and solidarity pillar - Self-funded pensions are projected to fall, on average, by 16 percent due to the withdrawals enacted in response to the pandemic. - The decline in self-funded pensions will be buffered by the pension supplement embedded in the solidarity pillar, resulting in a lower decline in total pensions (5 percent). - Fiscal implications of withdrawals: - At the peak (2060), the withdrawals are expected to lead to an increase of 6 percent in fiscal costs relative to pre-withdrawal levels (or an annual 0.12 percent of GDP). - The net present value of these flow of additional costs stands at roughly 2 to 3.5 percent of 2020 GDP (depending on assumptions). - Costs could be much more in the case of increases in the public solidarity contribution. ### Replacement rates and adequacy - Replacement rates in Chile compare poorly to other countries and are expected to fall further, especially after the two rounds of withdrawals. - Demographic trends, global conditions, and lack of parameter updates are expected to contribute to further declines in replacement rates of future retirees. ### Reform scenarios and projected effects - Increasing contribution rates, retirement age, and contribution density improve adequacy: - An increase in the contribution rate of 6 percentage points devoted to the self-funded pension would increase the expected replacement rate for the average of all current affiliates to 40 percent from 35 percent. - The same 6 percentage points increase would raise replacement rates for the 20-25 years old to 45 percent from 34 percent. - Comprehensive parameter changes produce larger and broader impacts: - Example combination: contribution rates to 16 percent, retirement age increased to 67, and contribution density to 70 percent will cause expected replacement rates for young people to increase to 59 percent for females and 66 percent for males. - Trade-offs and implementation notes: - Contribution density is not a direct policy parameter; increasing it requires labor market, structural, and fiscal policies to encourage formal labor market participation and job creation. - The analysis does not model future returns of pension fund investments as policy variables (though returns can be influenced by competition, portfolio allocations, or performance-related penalties). ### Fiscal space and solidarity strengthening - Strengthening the self-funded portion creates fiscal space to enhance the solidarity component: - The combination of measures in the previous paragraph will entail a reduction in the fiscal cost of the system by 0.8 percent of GDP in 2060. - This fiscal space could be used to strengthen the solidarity component of pensions in a targeted way. ### Institutional and procedural recommendations - Establish a periodic review process to adapt key parameters of the pension system to changes in life expectancy, global returns, and the labor market. - Suggestion: develop a more automated system of updating parameters (contribution rate, retirement age) at regular intervals such as five or 10 years. - Specific institutions could be tasked with preparing analysis and proposals. - The recent pension reform proposal that asks the Social Security Advisory Council to review demographic, economic and labor market trends every three years is cited as a step in the right direction. ### Data, projection methodology, and key assumptions - Data sources and key statistics: - SP (Superintendencia de Pensiones) provides affiliates data by gender, account balance and age, wages by age and account balance, and contribution density. - The average contribution density between January 2017 and December 2020 is 60% for males and 46% for females. - Withdrawal assumption for projections: - The projection assumes that individuals in each age-gender-account balance cell withdraw the maximum amount allowed for each withdrawal (implemented via the law’s formula). - Projection steps overview: 1. Project wages for each cohort from 2020 until retirement using a common growth rate for wages observed in June 2020. 2. Use assumptions on real return on pension funds and contribution densities to calculate private account balances at retirement. 3. Convert retirement balances into monthly self-financed pensions using CNU (Capital Necesario Unitario). 4. Calculate government supplement from the solidarity pillar as a function of the self-financed pension at retirement. 5. Compute replacement rates and fiscal costs (total supplement payments). - Parameter assumptions (selected): - Real returns on pension accounts: 4.15% per year. - Life annuity rate: 3.36% (assumed). - Real wage growth: 1.25% per year. - Parameters of the solidarity pillar (PBS and PMAS) are set according to 2019 announcements up to 2022; from 2022 onwards two scenarios are presented: - baseline with inflation indexation (2008 reform rule), - alternative with PBS and PMAS growing at the same real rate as wages (1.25%). *Source: Authors’ calculations and text in the provided IMF chapter.* ### Section 3 examines direct taxation. Section 4 looks at rationalizing indirect taxes. Section 5 refers to ### 1chlea2021002 - Section 3 examines direct taxation. Section 4 looks at rationalizing indirect taxes. Section 5 refers to ### B. How Does Chile’s Government Revenue Structure Compare Internationally? - Growth of Chile’s Revenue and Declining Reliance on Copper - Tax revenues, excluding social security contributions (SSC), increased by four percentage points since 1990 to about 19 percent in 2017. - Chile’s tax ratio now stands between the averages of upper-middle and high-income countries. - Chile’s tax revenues are higher than in Peru and Mexico but lower than in Argentina and Brazil. - In the last decade, Chile’s mining revenues declined by about 3 percentage points of GDP, partly due to changes in copper prices and lower taxable profits given the carry-forward of losses from past investments. - International Comparison of Chile’s Tax Structure - Chile relies relatively more on indirect taxes compared to peers. - Revenue from direct taxes (CIT, PIT, and property) as a percentage of GDP is similar to regional peers. - Chile collected proportionally more indirect taxes (VAT, excises, and trade taxes). - In OECD countries the reliance on direct taxes as percentage of GDP is higher than on indirect taxes. In Chile and on average in Latin America the inverse holds. - Key comparative deficits and strengths - Chile collects less than 2 percent of GDP in PIT, compared with the 8 percent of GDP average in both the EU and the OECD, and below the Latin American average. - PIT contributes 10 percent of total tax revenue in Chile versus 32 percent in OECD countries. - CIT contributes 23 percent of total tax revenue in Chile versus 12 percent in the OECD. - VAT contributes 45 percent of total tax revenue in Chile. - Sum of PIT and CIT revenue: OECD average is 11 percent of GDP; in Chile they add to 6 percent of GDP. - The gap between top PIT marginal rate and CIT rate has historically incentivized incorporation; CIT rate increased to 27 percent from an initial 15 percent rate, but a recent increase in the top marginal PIT rate broadened the gap again. ### Box 1. Declining Copper Revenue in Chile - Mining revenues declined to about 1.2 percent of GDP in 2020 from about 4.4 percent in 2010. - Changes in copper prices only partly explain the decline; production and unit costs remained broadly stable over the same period. - The remainder of the fall in revenues is attributed to the amortization of prior large capital expenditures which benefit from accelerated depreciation for tax purposes. - Mining revenues in Chile come from both the state-owned company Codelco and from private-mining companies; they include both non-tax and tax revenues (both from CIT and a mining-specific tax). ### Tax Compliance, A Comparative Overview - Definition and importance - The tax compliance gap is the difference between potential revenue given the policy framework and actual revenues. - Comparable data is extensive for VAT compliance gap but limited for income taxes, especially PIT. - VAT Compliance Gap - An IMF study (Ueda, 2017) found that in 2015 the VAT compliance gap in Chile was 19 percent of potential revenue. - This gap represented 1.9 percent of GDP, marginally below the prior seven-year average. - Chile’s Servicio de Impuestos Internos (SII) indicates the gap continued to decline modestly. - VAT compliance gaps in Latin America average slightly above 30 percent (Pecho et al, 2013). - To increase VAT collections by 1 percent of GDP through administrative improvements alone, Chile would need to halve its VAT compliance gap, bringing it to a level typical of countries with GDP per capita in the US$31,000 - 42,000 bracket. - CIT Compliance Gap - CIT compliance gap estimates are complex and uncertain; often “top-down” starting from gross operating surplus. - Ueda (2017) suggests estimates for Chile could be fine-tuned, reducing the CIT compliance to a range of 16 to 25 percent of potential revenue. - A high estimate of a CIT compliance gap of 40 percent implies an average fiscal loss of 1.3 percent of GDP. - A lower CIT gap as adjusted by Ueda (2017) represents a revenue loss of 0.8 percent of GDP. - International comparisons of CIT compliance gaps are difficult due to scarce and methodologically diverse estimates. - PIT Compliance Gap - The SII has not estimated a compliance gap for PIT. - Estimating the PIT potential base is more complicated and uncertain, relying on household income and expenditure surveys known for underreporting by high-income individuals. - Few countries produce PIT compliance estimates. - More attention should be paid to measuring and evaluating individual tax compliance. - Authorities may consider applying the Tax Administration Diagnostic Assessment Tool (TADAT) to objectively measure tax administration strengths and weaknesses. ### C. Increasing Direct Taxation - General approach - Explore PIT and CIT exemptions, deductions, and credits (tax expenditures) that can be reduced or eliminated to increase revenue and lessen distortions. - Consider PIT exemption thresholds and rates. - PIT Base and Rate Schedule - Measures to increase PIT revenue likely require a combination: - Eliminating or reducing some exemptions and deductions that mostly benefit high-income taxpayers (as recommended by the Commission of Experts). - Increasing the number of taxpayers by adjusting the exempt threshold. - Shortening brackets (increase speed at which scale reaches higher marginal rates). - Raising the lower and middle marginal tax rates in the schedule. - The combined impact on PIT progressivity must be explored further. - PIT tax expenditures and impacts - PIT tax expenditures are estimated at 1.2 percent of GDP (SII, 2019a), reduced to 0.9 percent if the deferral of tax on undistributed profits is excluded (per IMF/OECD (2020) Report). - Main tax expenditures flagged by the Commission of Experts include: - Exempt thresholds for capital gains on sale of housing and shares. - Deduction of voluntary contributions to pension plans. - (Partial) exemption of pension income (excedente de libre disposicion). - Mortgage interest deduction. - Some housing rental income. - No agreement within the Commission was reached on exemption of capital gains on sale of traded shares. - An updated quantification of tax expenditures remains pending and should take priority. - Coverage and distribution of PIT liability - In 2019, only 2.7 out of the 10.7 million registered individual taxpayers had income that exceeded the tax-exempt threshold (13.5 UTA, or about US$11,400). - Three-quarters (¾) of individuals are tax exempt in Chile. - The proportion of individuals within the exempt bracket declined from 84 percent in 2005 to 74 percent in 2019. - The system has become more progressive: share of total revenues from persons in the highest bracket (above 120 UTA) increased from 44 percent in 2005 to 61 percent in 2019. - Exemption threshold relative to income - Chile’s personal income tax threshold was nearly 80 percent of the country’s GDP per capita in 2018. - This compares with an average of 40 percent of GDP per capita for EU and other high-income countries which have an exemption threshold. - Some countries grant a general allowance instead, on average close to 20 percent of GDP per capita. - Only 23 countries have a tax-exempt threshold: 13 in LAC and 10 in the EU plus Australia and Switzerland. - Incorporating more individuals into the tax net is an option that should be explored. - Table and bracket data (UTA-based) - UTA (2019) = CHP 595,476 - Share of Taxpayers and of Total Tax Revenue by Income Bracket (In percent): - 0 - 13.5 (Exempt): Taxpayers 84.1 (2005), 74.2 (2019); Tax revenue 0.3 (2005), 0.2 (2019) - 13.5 - 30 (4%): Taxpayers 10.5 (2005), 16.9 (2019); Tax revenue 7.4 (2005), 5.1 (2019) - 30 - 50 (8%): Taxpayers 2.9 (2005), 4.8 (2019); Tax revenue 11.5 (2005), 7.7 (2019) - 50 - 70 (13.5%): Taxpayers 1.2 (2005), 1.8 (2019); Tax revenue 1.7 (2005), 7.5 (2019) - 70 - 90 (23%): Taxpayers 0.6 (2005), 0.9 (2019); Tax revenue 1.2 (2005), 7.4 (2019) - 90 - 120 (30.4%): Taxpayers 0.4 (2005), 0.6 (2019); Tax revenue 13.8 (2005), 10.8 (2019) - 120+ (35/40%)*: Taxpayers 0.4 (2005), 0.8 (2019); Tax revenue 44.1 (2005), 61.2 (2019) - *40% top PIT rate above 150 UTA eliminated 2017-2019 - Recent tax reform (2020) and expected impacts - Main elements: - Unifying the CIT regime to a semi-integrated system with a 27 percent flat rate. - A new simplified regime for SMEs (cash-flow based, fully-integrated system, 25 percent rate). - A higher top PIT marginal rate at 40 percent. - A VAT for digital services by non-resident providers. - Introduction of digital sales receipts. - The reform is expected to gradually raise tax revenues by about 1 ppt of GDP in the medium term. - It is not expected to fundamentally alter the relative revenue structure, including the low reliance on PIT versus other taxes. _italic_ International Monetary Fund — CHILE chapter content (excerpts) _italic_ ### 22. Adjustments to the tax rates of the PIT schedule could also be considered. Compared to ### 22. Adjustments to the tax rates of the PIT schedule could also be considered. Compared to ### Personal Income Tax (PIT): structure, international comparisons, and effectiveness - Findings - Each income bracket in the Chilean PIT schedule begins at a higher income per capita than in 75 percent of countries in the OECD. - The tax rate for each PIT income bracket in per capita terms is lower in Chile than in 75 percent of the same sample of countries. - The tax rates for each of the lower and middle brackets are modest and the increase in the rates is relatively slow. - The top brackets reach a very small proportion of taxpayers: only 0.8 percent of the total was in the top PIT bracket in 2019. - Until end-2019, the highest bracket applied to individuals with an income 7 times higher than the per capita income (compared to an average of about 3 times in OECD and high-income countries). - Since then Chile introduced a new top marginal rate of 40 percent for individuals with income higher than 8.5 times the per-capita income. - The new statutory top marginal rate for PIT (40 percent) is within the interquartile range among OECD countries and is above the 34 percent average of the top marginal rate for OECD countries (own calculation from OECD dataset, Central Governments PIT and Thresholds, year 2019). - A higher top marginal rate does not necessarily translate into a proportional increase in revenues because it strengthens incentives for evasion by high income individuals by opening the gap between top marginal PIT and CIT rates. - Evidence and measurement limitations - The effective PIT rate measured as the ratio of ‘determined’ PIT to be paid (impuesto determinado) to ‘determined’ income (renta determinada) per bracket would be unrepresentative because it would not consider credits and deductions applied by taxpayers, and excludes income not subject to PIT (like capital gains on traded shares) which is not reported to the SII. - Knowing the actual effective rates per income bracket would allow assessing more specifically the effects of measures on PIT progressivity. - Policy implications and recommendations - Consider an overhaul of the PIT schedule that lowers thresholds and increases rates, particularly for the middle brackets, to substantially raise revenues and increase the redistributive profile of the income tax (OECD Survey for Chile (2021) recommendation). - Reduce or eliminate exemptions and deductions that mainly favor high-income individuals, as recently recommended by the Commission of Experts. - Evaluate effective PIT rates per bracket, accounting for credits, deductions, and non-reported income, before implementing bracket/rate changes to better target progressivity outcomes. ### Corporate Income Tax (CIT) and special regimes - Findings - Chile’s CIT revenue in 2017 was 4.3 percent of GDP; the average in OECD and Latin America was 3 percent and 3.6 percent respectively. - SII estimates CIT tax expenditures at 1 percent of GDP for 2019. - Main CIT tax-expenditure components: leasing regimes (0.3 percent of GDP), accelerated depreciation of investment (0.2 percent of GDP), deduction of amortization of intangible assets (0.2 percent of GDP). - The IMF/OECD Report suggests tax expenditure on leasing and intangibles might be considerably overstated due to methodological deficiencies. - Special regimes that warrant revisiting - Cooperatives’ profits are fully exempt of income taxes (when income arises from internal transactions), including when distributed to members. - Companies operating in Free Trade Zones are CIT exempt; these tax expenditures are not estimated by SII or the calculation is notably outdated. - The ‘presumptive income’ regime (renta presunta) taxes small enterprises in some sectors on the basis of sales or assets rather than profits; it is now redundant given the introduction of the special SME regime (in the 2020 tax reform) which is more efficient and fairer. - The additional regime applying to the mining sector could be revisited via comparison with international practices (beyond the scope of this paper). - Policy implications and recommendations - Reexamine special CIT regimes (cooperatives, Free Trade Zones, renta presunta) to reduce distortions and opportunities for arbitrage. - Assess and potentially reduce tax expenditures with improved methodological estimates. ### Rationalizing indirect taxes: VAT exemptions and excises - VAT exemptions and issues - Chile has few VAT exemptions; major exemptions include education, public transport, unfurnished rental housing, financial transactions—standard in many countries. - Total VAT tax expenditure for 2019 estimated at 0.76 percent of GDP (SII, 2019a). - The exemption for professional services (provided either by individuals or legal persons) is uncommon internationally and could be revisited; its tax expenditure is estimated at 0.14 percent of GDP, but its overall effect could be larger as it can facilitate income tax evasion. - A 65 percent VAT credit for construction companies (applicable up to a price limit of the property) amounts to 0.19 percent of GDP and could be reconsidered. - Excises: fuels, tobacco, alcohol, sugar - Main revenue gap is with the diesel excise: - Diesel excise does not correct for negative externalities and is only ¼ of the excise on gasoline. - Trucking companies benefit from a tax credit ranging from 50 to 80 percent of the diesel excise paid; these two benefits amount to about 0.55 percent of GDP. - Excises on fuels are excluded from the VAT base, representing another loss of revenue of 0.15 percent of GDP. - Changes to fuel excises should be gradual over many years and start only after the economic recovery strengthens. - Other excise issues: - Novel tobacco products (e-cigarettes and heated tobacco products) should be taxed; evidence of increasing illicit trade in cigarettes suggests administrative measures to protect the tax base. - Alcohol taxation: ad valorem tax does not effectively target consumption and the tax burden is relatively low internationally; consider an additional specific excise based on alcohol per volume and include excise in the VAT base. - Consider introducing a tax on added sugar consumption, rather than the existing tax on sugary drinks, to more effectively reduce substitution between sugary drinks and sugary foods (Agostini et al, 2018). ### Green taxes and carbon pricing - Findings - Chile introduced taxes on greenhouse and carbon emissions in 2014; the tax design is sophisticated as it taxes pollutants other than CO2. - The tax rate is US$5 per ton of CO2, low for international standards and far from the level (US$75 global carbon tax per ton of CO2) cited as needed to achieve the COP21 target of limiting global warming to 2 degrees (Celsius) by 2030. - A US$75 carbon tax would decrease CO2 emissions in Chile by 31 percent by 2030 (IMF/WB, 2020). - In 2019, Chile’s green tax collected US$186 million from all fixed sources of emissions (Ministerio del Medio Ambiente, Gobierno de Chile (2019); 2019 annual exchange rate = CHP702.6/US$1). - The green tax collected represents only 34 percent of the general diesel excise tax credit given to the industrial sector; the green tax collected from diesel combustion was CHP7.8 billion, equivalent to only 2 percent of the general credit on the industrial use of diesel (the ’general credit’ on the diesel excise was CHP 379.4 billion in 2019 (SII)). - Policy implications and recommendations - There is ample room to raise the green tax on CO2 closer to international efficiency levels. - Strengthen green taxation progressively to improve environmental outcomes while considering competitiveness and distributional impacts. ### Conclusions and reform strategy - Key findings - Chilean tax system likely needs additional resources in the medium term to fund a permanent increase in social spending. - Largest deficit relative to OECD peers is in the personal income tax: PIT contributes less than 2 percent of GDP in Chile, while other high-income countries receive four times that amount. - Today only 25 percent of Chilean taxpayers actually pay income tax. - VAT and CIT revenues are relatively high, but opportunities exist to increase revenue while improving horizontal equity by revisiting exemptions and special regimes. - Significant room exists to gradually increase revenue from excises (particularly diesel) and green taxes (carbon). - Policy recommendations and priorities - Prioritize raising revenue by eliminating or reducing special regimes which are distortive. - Strengthen the PIT schedule (lower thresholds, increase middle rates) to increase revenue and progressivity, while assessing effective rates and enforcement constraints. - Reassess VAT exemptions (professional services, construction credit) to improve horizontal equity and reduce opportunities for evasion. - Reexamine CIT special regimes (cooperatives, Free Trade Zones, renta presunta) and update tax-expenditure estimates. - Gradually increase fuel excises (diesel) and bring excises into the VAT base, with phased implementation as economic recovery consolidates. - Raise green taxes toward internationally efficient levels, balancing emission reduction goals and economic impacts. - Implementation approach - Adopt a gradual, multi-front reform strategy composed of small steps on many fronts, each contributing a modest share of total revenue increase. - Avoid placing the taxation burden unevenly; aim to increase efficiency and equity. - Ensure reforms proceed as economic recovery consolidates to safeguard continuity in overall strategy. *Source: 1chlea2021002 - 22. Adjustments to the tax rates of the PIT schedule could also be considered. Compared to (IMF chapter content provided).* ### 1. Social unrest erupted on October 18, 2019, resulting in the largest demonstrations ### 1chlea2021002 - 1. Social unrest erupted on October 18, 2019, resulting in the largest demonstrations ### Background and market impact - Social unrest began on October 18, 2019, producing the largest demonstrations over the last several decades. - Human and physical impact: - over 30 deaths - over 2,500 injured security officers - over 10,000 detained persons - hundreds of looted stores and vandalized buildings - Exchange rate and volatility: - intraday volatility peaked at 4.15 percent on November 12, 2019 - average intraday volatility over the past decade was 0.74 percent - mid-November 2019 saw considerable exchange rate fluctuation driven by exceptional circumstances and public discussions about changing the Constitution - Investor behavior and market dysfunction: - Domestic investors (mainly pension and mutual funds, and wealthy individuals) sold long-term fixed-income securities and shifted into short-term liquid assets and FX, causing liquidity shortages and sharp increases in long-term rates. - Onshore US$ spread jumped from about 100 bps on November 12 to about 330 bps a week later. - FX market liquidity temporarily dropped, preventing normal price formation and fueling exchange rate volatility. ### BCCh intervention measures (late 2019) - Communication - November 12, 2019: Governor publicly stated BCCh stood ready to act against anomalous market situations using its broad toolkit. - FX swaps and repos - November 13, 2019: BCCh offered 30-day and 90-day FX swaps (at Libor plus 200 bps) up to a maximum amount of US$ 4 billion over two months. - Opened window for 30-day repo operations (at the monetary policy rate), providing longer tenor and 25 bps lower cost versus overnight facility. - Objective: increase liquidity in FX and peso markets; provide a backstop to prevent small banks from being unable to roll over FX liabilities. - Peak outstanding swaps: US$ 1.1 billion in late-November/early December, 2019. - Securities buyback and expanded repos/swaps (November 14, 2019) - Suspended issuance of new central bank paper/securities. - Initiated buyback of BCCh securities to inject liquidity. - Increased frequency of FX swap and repo operations. - Extended maturity of repo operations. - Expanded collateral eligibility for repo operations to commercial bank bonds and deposits. - Objective: improve peso liquidity, reverse sharp increases in long-term peso rates, and ease pressure on the longer end of the curve. - FX spot and forward interventions (announced November 28, 2019) - Announced interventions in spot and forward markets up to a maximum amount of US$ 10 billion in each market over the next six months (initial end-date May 29, 2020). - Began by offering US$ 200 million per day (on spot and forward each) in the first week, then gradually reduced offered amounts as demand abated. - Early January: paused spot intervention and limited forward program to renewal of maturing forward contracts. - Total amounts: spot interventions about US$2.5 billion; forward interventions about US$4.5 billion. - Rationale: tame excessive exchange rate volatility, avoid self-fulfilling runs, and complement with NDF operations given importance of forward market for hedging. - Distinct roles of markets - Spot and NDF interventions transferred exchange rate risk from the market. - Swap operations helped financial institutions cope with rollover risk (temporary loss of US$ funding access). - Interventions across interconnected markets produced positive externalities. ### Effects of the late-2019 interventions - FX swaps and liquidity operations provided temporary liquidity in US$ and peso markets and halted the increase in onshore US$ funding costs. - Market access normalized quickly; counterparties repaid most US$ loans as access was restored. - Announcement of FX spot intervention (with forwards) was essential in restoring confidence: - Restored normal market functioning and avoided exchange rate overshooting. - Reduced expectations of depreciation. - Exchange rate started appreciating after the announcement, reversing most of the November depreciation and stabilizing in late December, aided by recovery of copper prices and local political developments. - Financial market transactions and price formation processes normalized; fixed-income markets stabilized. - Demand for precautionary reserves normalized following BCCh liquidity announcements: - Limited take-up at liquidity operations; BCCh able to drain some liquidity as soon as December 2019. - Yields decreased, credit spreads compressed, and the yield curve flattened in January 2020 compared to December peak, though remained worse than pre-unrest period due to a higher liquidity premium. - Buyback program reduced average residual maturity of sterilization securities from several years to a few weeks, contributing to flattening the yield curve, especially in the 1 to 5-year segment. ### Episode II: COVID-19 outbreak — context and market effects - After relative stability in early 2020, capital outflows returned in March 2020 amid the Covid-19 outbreak, aligning with emerging market trends. - Pressures renewed on the peso exchange rate and on-shore US$ funding market: - Increased preference for liquidity stressed bank funding. - Concerns about corporates’ profitability threatened credit flow. - Onshore US$ spread increased again, though less than during the social unrest. ### BCCh measures in response to Covid-19 (March–June 2020) - Extending FX intervention window - March 16, 2020: extended time window for possible FX spot and forward interventions and FX swaps from May 29, 2020 until January 9, 2021. - Extended FX swaps maturities to 90 and 180 days (in addition to 30 days) and increased maximum daily amounts. - Authorities did not implement any FX spot intervention and only rolled over expiring forward contracts until June 2020. - Policy rate cuts and repo extension - March 16, 2020: reduced policy rate by 75 basis points. - March 31, 2020: policy rate cut by additional 50 basis points to 0.5 percent (considered effective lower bound by BCCh). - March 16, 2020: expanded available repo maturities and included corporate bonds as collateral. - Funding-for-lending program - March 20, 2020: introduced funding-for-lending program (FCIC1 initially): - Basic component: long-term funding up to 4 years to refinance up to 3 percent of the bank’s existing portfolio (about US$4.8 billion). - Additional component conditional on banks’ provision of loans, with a bonus allocation for loans to SMEs, in the total amount of US$19.2 billion. - June 16, 2020: announced FCIC2 in the total amount of US$16 billion, operational in July 2020 with an 8-month lifespan. - January 28, 2021: announced FCIC3 with a maximum amount of about US$10 billion, corresponding to the unused amount of FCIC2. - Overall potential funding-for-lending program reach: up to about US$40 billion in total. - Bank-bond buying and asset purchase programs - March 20, 2020: BCCh to buy up to 5-year maturity bank bonds at a premium over the local OIS curve, depending on issuer rating. - June 16, 2020: introduced second asset purchase program encompassing purchase of bank bonds and buyback of BCCh securities in the total amount of US$8 billion (framed as regular QE). - BCCh-securities buyback discounted remaining flows at the monetary policy rate for bonds maturing up to 3 years. - Phasing out interventions - June 3, 2020: BCCh announced intent to gradually reduce stock of NDFs (maintained at about US$4.5 billion since January) through partial renewal of maturing NDFs to phase out participation over next four months. - By end-October 2020, stock of outstanding NDFs dropped to zero. - Option to engage in FX swaps until January 2021 with a maximum amount of US$4 billion was maintained; demand dropped and outstanding FX swaps declined to zero by end-June. ### Effectiveness of Covid-19 measures - BCCh did not sell FX on the spot market nor increase the stock of NDFs after extending intervention timeline; demand for forwards remained high until June 2020. - FX swaps peak and decline: - Demand for FX swaps peaked in mid-April with overall stock reaching about US$1.2 billion, declining to zero by late June. - Yields and spreads: - Yields decreased and credit spreads compressed in May-June compared with March-April peaks, but remained worse than January-February (pre-Covid). - Yield curve shifted downwards in May-June relative to March-April and January-February, while staying somewhat steeper than January-February. - Over second half of 2020, yield movements were generally limited and the curve remained relatively stable until December 2020. - Bond-buying programs supported movement into risky assets by institutional agents and boosted demand for corporate bonds. ### Overall assessment - The late-2019 FX interventions demonstrated effectiveness under extreme circumstances: - Interventions were the first significant FX interventions since early 2000s, reflecting BCCh’s high tolerance for exchange rate volatility. - BCCh rationalized interventions based on a comprehensive assessment that unusual circumstances impaired market functioning and produced excessive exchange rate volatility harmful to economic decision formation. - Fast stabilization of financial market conditions indicated effectiveness of programs. - Announced interventions—owing to unprecedented size—reassured market participants about BCCh’s readiness and commitment, reducing the need for actual intervention. - In contrast, during the unprecedented global shock of Covid-19, BCCh relied on a different mix of measures (liquidity provision, support to credit, asset purchases, funding-for-lending) rather than resuming outright FX spot interventions or expanding FX forward interventions. - Anchored in BCCh’s strong policy track record and credibility, these measures—together with more favorable global developments—contributed to restoring market functioning, relative stability, recovery of capital inflows, and appreciation of the peso. ### Annex I — Flight to Safety (summary) - Domestic investors (mainly pension and mutual funds, and high-wealth individuals) sold domestic fixed income and moved proceeds into US$ assets abroad. - This flight to safety pressured the domestic foreign exchange market, producing its highest volatility since the floating exchange rate introduction in 1999, including a five percent intraday depreciation on November [text cutoff]. *International Monetary Fund — Chapter content.* ### 12. This occurred ### 12. This occurred ### Market dynamics during episode - Non-residents took a counterbalancing position that contributed toward stabilizing FX and fixed-income markets at the beginning of this episode. - Volatility boosted exchange rate depreciation expectations, triggering more relocation from peso to US$ assets, including reallocations between different types of pension funds as pension members could reallocate at short notice large part of their investment from peso denominated funds to US$ denominated funds. - Exchange rate expectations became skewed toward the extremes reflecting heightened uncertainty. - By buying US$, investors aimed at transferring the exchange rate risk of holding peso assets and also affected the availability of US$ funding in the domestic market as fewer counterparties were willing to lend US$, increasing US$ funding roll-over risk. ### Onshore US$ funding costs - Onshore US$ spread (the difference between the US$ interest rate implied by a local-market forward contract and the US$ Libor rate) rose from about 100 bps on November 12 to about 330 bps a week later. - Higher costs were particularly felt by banks without credit lines abroad, and—to a lesser extent—also by those with foreign lines of credit. ### The liquidity premium and fixed-income markets - Flight to US$-denominated assets accompanied by sale of peso fixed-income assets and increased precautionary demand for liquidity impaired fixed-income markets (mainly bank and corporate bonds). - Markets experienced considerable increases in yields, term premia, and credit spreads. - Mutual funds faced high demand for redemption, reaching 30 percent of the portfolio on average. - Mutual fund average maturity of fixed income under management increased from 280 days to 716 days over the past decade. - Banks demanded unprecedented amounts of reserves at the central bank for precautionary reasons. ### Cost of hedging - Cost of FX hedging in Chile, as measured by the ratio between the forward rate and the rate implied by the covered interest parity, changed considerably in two episodes of market turbulence: - It spiked sharply in mid-November 2019 at the time of the social unrest before stabilizing amid interventions introduced by BCCh. - It spiked again amid high uncertainty with the Covid-19 outbreak in March 2020 and, despite some normalization with stabilization of financial market conditions in May 2020, has remained elevated relative to normal times but still below the two spikes during the turmoil episodes. ### Banks’ demand for liquidity (context) - Banks demanded unprecedented amounts of central bank reserves as the safest peso-denominated assets for precautionary reasons during redemption pressures. ### Financial sector developments during the COVID-19 crisis — overview - The note presents financial sector developments during the Covid-19 crisis, focusing on banking sector exposure to households and corporates. - The Covid-19 crisis substantially slowed loan growth, especially consumer loans, due to high uncertainty. - Government measures helped households and corporates maintain access to credit and helped banks maintain asset quality in the short term. - Medium-term risks to the banking sector (once temporary policy measures expire) appear limited at this moment but warrant close and vigilant monitoring. ### A. Background — credit aggregates and dynamics - Total credit-to-GDP ratio, including loans and securities, reached 171.2 percent in 2020Q2. - This ratio is substantially higher than neighboring economies or other emerging markets, and close to the OECD average, 176.5 percent. - The positive credit-to-GDP gap in the last decade might reflect sound growth in financial intermediation, financial deepening, followed by recent policy responses to the Covid-19 crisis. - Growth rate (yoy) of nominal credit to private non-financial sector jumped from 3.0 percent in 2018Q1 to 17.8 percent in 2020Q2, while nominal GDP growth rate dropped from 7.2 percent to 1.6 percent. - Recent credit growth after 2018 associated with increase in credit from non-banks and credit to corporates. - Loan growth rate from the banking sector plummeted from 8.4 percent in March 2020 to -0.6 percent in January 2021, mainly due to decline in consumer loans, followed by slower corporate loan growth in 2020H2. - Non-performing loan ratio reached 1.6 percent as of December 2020, the lowest among LA5 countries, helped by supervisory support that allowed extension of payment installments. - As of July 31, about 38% of the mortgage loan portfolio had extensions, 19% of consumer loans, and 37% of commercial loans. - Capital adequacy ratio increased rapidly and reached 14.3% in October 2020, the highest in the last decade; recent increase driven by decline in risk-weighted assets due to changes in risk-weights and decline in consumer loans and strengthened supervisory standards. - Liquidity coverage ratios (LCR) for all banks remain above regulatory limits (70%). ### B. Exposure to household sector - Consumer loans fell by -17.0 percent in January 2021 from an expansion of 5.2 percent in September 2019. - Upward trend of mortgage loans reversed since June 2020. - Both demand and supply factors contributed to contractions; bank loan survey indicates downward trend of loan demand for both consumer and mortgage loans after social unrest accelerated by lockdowns. - Delinquency rate of household loans remains low due to government support: voluntary mortgage and consumer loan payment relief and forbearance programs lowered delinquency after July 2020. - Two pension fund withdrawals, amounting to 14 percent GDP (USD 36 bn), accompanied by direct income transfers and other labor market policies, enabled households to pay off past-due debts. - During 2020H2, about 600,000 people paid past-due maturities with financial entities and exited from the listing of delinquent debtors (DICOM). ### C. Exposure to corporate sector - Growth rate (yoy) of real commercial loans fell from 9.9 percent in April 2020 to 3.0 percent in January 2021. - Increase in loan growth rates in May and June mainly due to launch of government guaranteed FOGAPE-COVID line in conjunction with Central Bank lending facilities and asset purchase programs. - FOGAPE-COVID and central bank measures compensated declines in commercial loan growth by a total of 9.1 trillion Chilean pesos (as of December 2020). - Construction, commerce, and service industries were most severely affected, but commercial loans to these sectors expanded until September 2020. - Delinquency rate of commercial loans declined from 2.1 percent in December 2019 to 1.6 percent in December 2020, due largely to extraordinary support measures and temporary regulatory changes allowing banks to adjust credit term for SMEs up to 6 months without such rescheduling being treated as renegotiations for provisioning purposes. ### D. Risks and mitigating factors - Pockets of stress could emerge as COVID-19 policy measures expire; if the pandemic lasts longer or recovery is slower, higher leverage in context of low output could pose future financial risks. - Aggregate household debt to disposable income ratio reached 76.4 percent in 2020Q3, associated with increased mortgage debt and financial deepening. - Substantial heterogeneity and market segmentation of household debt: sizable share is mortgage credit, generally allocated to less risky households. - Annual growth of consumer loans has contracted; interest coverage ratios of some listed firms have turned negative, suggesting difficulties in servicing debts. - Higher leverage and banks’ lower interest margins can make both firms and banks more vulnerable under stressed scenarios. - Banks imposed stricter lending standards to new loans to households and firms since social unrest in 2019. - FOGAPE-COVID was allocated to firms with low historical delinquency ratios that had an important drop in sales and were able to recover faster; banks’ lending standards to SMEs were tighter than previous years due in part to deductibles in FOGAPE loans and low cap for interest rate. - Banks increased provisions to more than 1.6 times of NPL to address credit risks and reduced lines of credit from riskier clients. - Liquid asset to total asset ratio reached 20.5% as of Sep. 2020, historically highest level. - Central Bank stress test (Financial Stability Report 2020H2) indicates banking system is well capitalized even in stressed scenario. - Authorities introduced regulatory changes to expedite authorization for firms issuing bonds and commercial paper, eased restrictions on private debt placements, and expedited issuance of convertible debt to facilitate debt restructuring. - Recent refinancing schemes (FCIC3), FOGAPE-Reporgramacion and FOGAPE-Reactiva expected to alleviate firms’ financial burdens by allowing rollovers. - Scheduled implementation of Basel III standards at the end of 2021 will enhance resilience of the banking system. - Recommendation: continue sound monitoring and supervision; careful vigilance and supervision will be essential to contain financial sector risks going forward. ### Asset prices and capital flows during the COVID-19 pandemic - Despite intense external stress and global financial turmoil, the exchange rate acted as a shock absorber and Chilean asset markets rebounded steadily, especially the currency. - Non-residents were net sellers of Chilean assets, offset by residents’ repatriation of foreign assets; large domestic institutional investors played a stabilizing role in local securities markets. - No clear indications that substantial liquidity support caused asset price bubbles. - Currency ended 2020 stronger than it started (buoyed by copper prices). - Bond yields recovered across the term structure and the slope of the yield curve steepened. - Stock market quickly recovered much of March 2020 losses but remained about 20 percent below its early-2020 market capitalization. - Ratio of housing prices to income has been relatively stable. ### A. External shock and policy response - The Covid-19 pandemic led to world economic activity collapse in second quarter of 2020, commodity price declines, and spiked risk aversion prompting capital outflows from emerging markets. - Central Bank of Chile cut the policy rate to what it regards as the effective lower bound of 0.5 percent, introduced funding-for-lending facilities and asset purchase programs, increased set of currencies eligible for maintenance of FX reserve requirements, and expanded securities admissible as collateral in repo transactions. - Fiscal measures provided a multi-year additional stimulus of about US$28bn (11 percent of GDP). - Financial regulation was adapted to support credit flow; domestic policy response reinforced by stabilizing effect of policy measures in advanced economies. ### B. Capital flows — resident and non-resident behavior - Non-residents were net sellers of Chilean assets between February and March 2020, particularly debt and derivative securities; cumulatively for 2020, non-residents were net sellers of Chilean assets equal to US$7.2bn. - Gross inflows: US$13.8bn in 2019, and US$18.3bn on average over the past decade. - Gross outflows (net purchases of foreign assets by residents) spiked in January 2020 following social unrest; repatriation of funds occurred between February and March 2020 as fund managers shifted allocations to low risk domestic assets. - Repatriation by pension funds during March 2020 was approximately equal to the sum of pension fund outflows between January and February 2020. - Cumulatively for 2020, gross outflows were minus US$7.1bn: residents, including pension and some sovereign funds, were net sellers of foreign assets. - Resulting increased holdings of safe domestic assets in funds’ portfolios helped ensure availability of liquid resources to meet demand for pension withdrawals. - The tendency of resident investors to repatriate foreign assets when non-residents exit local markets acted as a stabilizer and alleviated the need for external buffers. - Financial account result for 2020: close to zero (US$80m in net outflows), compared to US$8.5bn of net inflows in 2019. *Source: Chapter 12, "This occurred", IMF staff report chapter (excerpts).* ### 6. Bonds. The sudden stop and negative ### 6. Bonds. The sudden stop and negative ### Bonds, market response, and Treasury actions - The sudden stop and negative gross inflows between February and March 2020 were largely concentrated in portfolio debt securities, as non-resident investors exited the bond market. - Non-residents’ share in government securities holdings fell from about 18 to 13 percent between March and May 2020. - Bond prices fell and yields rose, especially along the medium- and long-term segments of the yield curve. - The Treasury aligned its debt issuance with market developments: - Reduced the maturity of peso-denominated securities issued domestically, responding to lower investor demand for long maturities (the drop in demand was in part due to pension funds’ need for liquidity, following the pension withdrawals). - Tapped international markets, moving slightly away from the long-term practice of keeping external bond issuance to one-fifth of total (towards 23 percent), which helped preserve space for private sector issuers in the domestic fixed-income market. - Issued at the short end of the curve, taking advantage of temporarily low rates. - The combination of market developments—including spillovers from US monetary policy to domestic long-term yields—and monetary and fiscal policy actions: - Contributed to lower short-term rates. - Resulted in a steepening of the yield curve. - Specific issuance outcomes (May 5, 2020): - The Treasury issued 1.46 billion in US$ denominated bonds at 2.45% with subscription exceeding 5.7 times the intended allotment. - On the domestic market, the Treasury issued US$ 3.7 billion of bonds and bills with an average maturity in 2023 and US$ 1.4 billion of inflation-linked bonds with average maturity in 2021. ### Currency - The peso recovered steadily from the Covid-19 shock, buoyed by a vigorous rebound in copper prices. - Recovery is consistent with the weight of copper exports in Chile’s merchandise trade and with its effect on the expected path of interest rates. - Recovery occurred despite: - The absence of official intervention in the spot FX market. - Very limited intervention through derivatives (essentially an extension of the terms of FX forwards and swaps used in response to the social upheaval that preceded the pandemic). - Despite high short-term currency volatility, the market remained functional, obviating the need for intervention given the authorities' commitment to a fully flexible exchange rate. ### Equities - The stock market fell sharply in March 2020, along global markets, amid the peak of Covid-19 uncertainty and a rebalancing of portfolios towards safe-haven assets (cash in particular). - The stock market lost approximately one-third of its value within two weeks in March. - Fast policy response allowed a relaxation of domestic financing conditions; the stock market recovered partially from April 2020. - By May 2020, the local bourse was about 20 percent below its level at the beginning of the year, and it broadly remained there despite the copper price boom. - Structural note: the largest copper mining operations in Chile are owned by foreign-listed entities or fully owned by the state; this characteristic limits the direct effect of copper prices on the market capitalization of the local stock market. - No obvious indications of an asset price bubble in Chile’s stock market: despite extensive liquidity support, the price-earnings ratio is close to its long-term average. ### Housing - No obvious signs of an incipient housing bubble in response to the ample liquidity support. - Indicators: - The rate of growth of housing prices has been moderate. - Household indebtedness has been falling. - The ratio of residential housing prices to income has been relatively stable and is now among the lowest in the region. ### Poverty and distributional impacts of the COVID-19 pandemic in Chile — overview - Chile reported its first confirmed COVID-19 case on March 3, 2020. - The economic contraction caused by the COVID-19 pandemic significantly impacted household welfare. - The note presents microsimulation estimates of short-term impacts on income-based poverty and inequality, accounting for labor and non-labor income shocks and assessing the effectiveness of selected social protection measures implemented by the government. ### Key social and labor impacts - Over one million jobs were lost in 2020, especially in commerce, agriculture, and hospitality sectors. - Almost 60 percent of households experienced declines in total household income at the beginning of the pandemic. - Job losses disproportionately affected women, low-skilled workers, and those unable to work from home. - Female-headed households and households at the bottom of the income distribution experienced higher income reductions than male-headed households and households at the top. - Women accounted for 57 percent of job losses in 2020. - Female labor force participation decreased by 7.4 percentage points in 2020 from 52.7 to 45.3. - Male labor force participation decreased by 5.3 percentage points in 2020 from 73.8 percent to 68.5 percent. ### Government policy response and coverage - The government implemented a wide range of measures: - Support for employment and firms’ liquidity (enhanced subsidies and unemployment benefits, tax deferrals, liquidity provision to SMEs). - Programs targeted to the most vulnerable with little or no formal income (direct cash and in-kind transfers). - Programs targeted to the middle class suffering severe income losses (soft loans from the treasury, mortgage payment delays, subsidies for rentals, and direct cash transfers). - Around 46.7 percent of surveyed households in the third round of the World Bank’s high-frequency phone survey in August reported having received either direct in-kind or cash transfers. - The large increase from round 1 to round 2 is explained by expansion of in-kind transfers (canastas de alimentos) and increased coverage of the Emergency Family Income to the 80 percent most vulnerable in the Household Social Registry. ### Microsimulation model: data, scope, and measures included - Core data sources: - CASEN (Encuesta de Caracterización Socioeconómica) – Chile’s representative national socioeconomic survey. - ENE (Encuesta Nacional de Empleo) – Chile’s Labor Force Survey. - Macro-economic projections on non-labor income shocks and information on policy measures. - Model methodology summary: - Sectoral employment shocks estimated from Labor Force Survey data. - The model estimates individual workers’ likelihood of losing employment and calculates household income changes from employment losses, reductions in earnings for those retaining jobs, unemployment insurance payments, and changes in non-labor income. - The model then assesses the impact of social protection mitigation measures on household income. - Social protection measures included: - Minimum Wage Guarantee (Ingreso Mínimo Garantizado) - COVID benefit (Bono COVID) - Employment Protection Law (Ley de Protección de Empleo) - Emergency Family Income benefit (Ingreso Familiar de Emergencia) - Middle-class benefit (Bono COVID para la Clase Media) - Christmas COVID benefit (Bono COVID Navidad) - Pension withdrawals are not included as social protection measures in the model; they are treated as dissaving. Indirect effects of withdrawals are captured through a boost in sector growth rates. - Model limitations: - Estimates limited to short-term static monetary effects; behavioral responses and general-equilibrium effects are not incorporated. - Does not capture longer-term effects such as population health shocks, foregone human capital accumulation, or risks to gender equality. - Poverty and inequality are calculated as annual indicators and do not capture temporary impoverishment. - Results depend on assumptions about earnings losses for retained workers and exclusion errors in policy implementation. - Appendix 3 presents sensitivity checks showing poverty estimates are fairly robust to changes in modeling assumptions. ### Microsimulation results: poverty and inequality with and without mitigation - International poverty line (US$5.5 per day in 2011 PPP): - 2019: 3.3 percent of Chileans had income below US$5.5 per day. - In the absence of social protection measures, this would have increased by 5.2 percentage points to 8.4 percent in 2020. - This implies around nearly one million people would have fallen into poverty according to this metric. - National poverty rate (equivalized income, national definition): - 2019: 8.1 percent. - In the absence of mitigation measures, would have increased by 10.6 percentage points to 18.8 percent in 2020. - This implies about 2.0 million people would have been pushed into poverty as measured according to Chile’s national definition. - Inequality (GINI index): - 2019: 44.5 percent. - In the absence of mitigation measures, would have increased to 46.5 percent in 2020. *Source: 6. Bonds. The sudden stop and negative — IMF staff chapter content as provided in the supplied PDF excerpt.* ### 11. Although social protection programs helped to offset the very worst effects of the ### 1chlea2021002 - 11. Although social protection programs helped to offset the very worst effects of the ### Key findings on poverty and inequality - Once social protection programs are accounted for, the share of the population living on less than US$5.5 per day is expected to have remained stable at 3.3 percent. - Inequality is expected to have remained effectively unchanged in 2020. - National poverty (equivalized income below the national poverty line) is expected to have increased by 4.1 percentage points, from 8.1 to 12.2 percent. - About 780 thousand people are expected to have fallen into poverty. - Female-headed households: - Without mitigation measures in 2020, international and national poverty rates would have increased to 9.9 and 21.6 percent respectively. - With social protection measures, these poverty rates increased to 4.0 and 14.2 percent respectively. - Poverty in female-headed households remained above that in male-headed households (2.9 and 10.9 percent respectively). - Downward mobility and middle-class impacts: - Vulnerable population (daily per capita income between US$5.5 and US$13 in 2011 PPP) is expected to have increased from 27.8 to 39.2 percent. - Middle-class (daily per capita income between US$13 and US$70 in 2011 PPP) is expected to have contracted from 63.3 to 53.3 percent. - Almost 19 percent of the pre-pandemic middle-class — around 2.3 million people — is expected to have fallen below the vulnerability threshold (US$13) or even the international poverty threshold (US$5.5). - Nearly 2.8 million people — about 15 percent of the population — are expected to have experienced downward mobility. ### Role and effectiveness of social protection measures - Emergency Family Income benefit (IFE) impact: - The IFE offset 71 percent of the total increase in international poverty (3.7 out 5.2 percentage points of poverty increase). - The IFE offset 38 percent of the increase in national poverty. - Other measures: - Minimum Wage Guarantee (IMG) offset 27 percent of the total increase in international poverty and 23 percent of the increase in national poverty. - Employment Protection Law (LPE) offset 15 percent of the total increase in international poverty and 10 percent of the increase in national poverty. - Despite mitigation, vulnerable and lower-middle-income households experienced income slides that were only partially offset. ### Employment and income shocks (microsimulation inputs and outcomes) - Aggregate employment shock: - Total employment dropped by 11.7 percent in 2020 and over one million jobs were lost. - Job losses: -1,060,915 (total). - Sectoral employment growth and job losses (mobile quarter Oct-Dec 2019 to Oct-Dec 2020): - Total employed: 9,087,132 → 8,026,217; Employment growth 2019-2020 (percent) -11.7; Job losses -1,060,915; Share of job losses (percent) 100 - Formal Agriculture: 425,775 → 365,626; Employment growth -14.1; Job losses -60,149; Share of jobs losses (percent) 5.7 - Informal Agriculture: 304,551 → 208,444; Employment growth -31.6; Job losses -96,107; Share of jobs losses (percent) 9.1 - Formal Industry: 1,498,681 → 1,256,999; Employment growth -16.1; Job losses -241,682; Share of jobs losses (percent) 22.8 - Informal Industry: 518,435 → 492,229; Employment growth -5.1; Job losses -26,205; Share of jobs losses (percent) 2.5 - Formal Services: 4,578,125 → 4,238,284; Employment growth -7.4; Job losses -339,841; Share of jobs losses (percent) 32.0 - Informal Services: 1,761,567 → 1,464,635; Employment growth -16.9; Job losses -296,931; Share of jobs losses (percent) 28.0 - Earnings loss assumptions (main scenario used in text): - Salaried workers assumed income loss of 30 percent. - Non-salaried workers assumed income loss of 50 percent. - Appendix 3 considered lower (10 percent salaried, 25 percent non-salaried) and higher (50 percent salaried, 75 percent non-salaried) loss scenarios. - Non-labor income shocks: - Remittances dropped by 10.7 percent in 2020 (World Bank macro projections); less than one percent of households in CASEN reported receiving remittances. - Income from capital and rent assumed to be reduced by 20 percent. ### Microsimulation model design and key assumptions - Base datasets and updates: - Microsimulation model based on CASEN 2017, Labor Force Survey 2019-2020, and World Bank’s macroeconomic projections. - CASEN 2017 data updated to 2019 pre-pandemic situation: population weights adjusted; income sources updated to 2019 nominal prices using the Nominal Remuneration Index (NRI). - Employment probabilities estimated via multinomial logit with seven outcomes (formal/informal across agriculture, industry, services, and unemployed/inactive) using sociodemographic and geographic covariates. - Employment ranking: workers ranked by probability of losing employment; losses allocated consistent with sectoral employment changes. - Unemployment insurance: share of formal workers affiliated with unemployment insurance calculated from Pensions Authority sample; an identical share in CASEN randomly classified as eligible; permanent contracts assigned five payments, fixed-term contracts three payments per Unemployment Insurance Law rules. - Targeting error: a modest exclusion error of 10 percent assumed when simulating beneficiaries; Appendix 3 shows sensitivity for 0 and 5 percent exclusion error. - Poverty and inequality estimation: household per-capita income recalculated under COVID-19 shocks and under COVID-19 plus mitigation; income-based poverty and inequality indicators estimated for both scenarios. ### Transitions across income classes (selected microsimulation results) - Panel A. Transitions as a percentage of the population in each income class before the pandemic (COVID-19 + mitigation): - Pre-COVID-19 Poor: 58.6 41.4 0.0 0.0 100.0 - Pre-COVID-19 Vulnerable: 4.9 93.3 1.8 0.0 100.0 - Pre-COVID-19 Middle-class: 0.1 18.8 81.1 0.0 100.0 - Pre-COVID-19 Upper-class: 0.0 0.0 26.6 73.4 100.0 - Total: 3.3 39.2 53.3 4.1 100.0 - Panel B. Transitions in total number of individuals x 1000 (COVID-19 + mitigation): - Pre-COVID-19 Poor: 366 258 0 0 624 - Pre-COVID-19 Vulnerable: 261 4,964 94 0 5,319 - Pre-COVID-19 Middle-class: 9 2,276 9,816 0 12,101 - Pre-COVID-19 Upper-class: 0 0 285 786 1,072 - Total: 637 7,498 10,195 786 19,116 ### Economic recovery projections and implications for poverty - World Bank Real Per-Capita GDP Growth Projections (Real GDP per-capita levels (x1000), LCU constant): - 2019: 8,188 - 2020e: 7,635 - 2021f: 8,011 - 2022f: 8,273 - 2023f: 8,479 - Real GDP per-capita growth (annual percent), LCU constant: - 2020e: -6.8 - 2021f: 4.9 - 2022f: 3.3 - 2023f: 2.5 - Under assumptions of neutral distributional effects and a GDP to income pass-through rate of 0.8: - The share of the population living on US$5.5 could decrease to 2.7 percent in 2021. - Incomes of the vulnerable and the middle class would not yet recover — and national poverty would not revert — to pre-pandemic levels in 2021 under these assumptions. - The projections come with significant uncertainty and depend on future policy actions and social protection measures; Appendix 3 explores sensitivity to higher pass-through rates. ### Policy reflections and recommendations - Continue emphasis on social protection: - Social protection measures are expected to remain critical as the labor market and household incomes may not immediately return to pre-pandemic levels even with rapid GDP growth in 2021. - Emergency Family Income benefits played the largest mitigating role and should be considered central for those who cannot return to employment. - Short-term priorities: - Targeted support for vulnerable and lower-middle-income households, who experienced downward mobility and incomplete recovery of incomes. - Sustained access to social protection for women who cannot return to the labor market. - Gender-specific actions: - Facilitate school reopening and availability and access to daycare and childcare to enable women to return to work. - Pursue longer-term measures to promote gender parity in labor market outcomes, including more balanced division of caregiving duties and a more equal distribution of occupations by gender. - Measurement and data: - Empirical measurement is essential; new CASEN data being collected are expected to be released in June of 2021 and will provide accurate insight into the true effect of the COVID-19 pandemic. *Source: Microsimulation model based on CASEN 2017, Labor Force Survey 2019-2020, and World Bank’s macroeconomic projections.* ### Appendix II. Policy Measures ### Appendix II. Policy Measures ### Overview - The microsimulation model accounts only for policy measures targeted to individuals and households; measures targeted to firms are not simulated due to micro-data limitations. - All amounts reported are in Chilean pesos (CLP). ### COVID Benefit (Bono COVID) - One-time cash transfer to support the most vulnerable households. - Eligibility criteria and amount received: - a) Beneficiaries of the Single-Family Subsidy (Subsidio Único Familiar): Beneficiary households received $50,000 CLP for each eligible household member (single mother with children under 18, children under 18, and disabled individuals of any age not receiving disability pension). - b) Households that belong to the program Chile Securities and Opportunities (Ethical Family Income Programme -IEF): Eligible households received $50,000 CLP per household. - c) Other vulnerable households: 60 percent of the most vulnerable households according to the Household Social Registry that do not have incomes from formal work or pensions and are not eligible under (a) and (b). Eligible households received $50,000 CLP per household. ### Employment Protection Law (Ley de Protección de Empleo) - Established extraordinary and transitory measures to protect income and jobs of workers unable to provide services or who must adjust working hours due to the Covid-19 pandemic. - Three extraordinary measures: - Temporary suspension of the employment contract by government decree (quarantine). - Temporary suspension of the contract by mutual agreement. - Reduction of working hours by mutual agreement. - For suspensions by government decree, employers continue to pay mandatory social insurance contributions excluding contributions for work-related accidents. - Eligibility criteria and payments: - a) Temporary suspension by government decree (quarantine): - Workers affiliated to the Administrator of Unemployment Funds (Asociación de Fondos de Cesantía) who met any of: - continuously contributed during the last 3 months before applying; or - contributed at least 6 months in the last year and the last two contributions had been made with the same employer during the last two months before suspension. - Unemployment insurance payments: first payment 70 percent of workers' average monthly gross salary in the last 3 months, then 55 percent until individual account funds are exhausted. When individual account funds are exhausted, remaining payments are charged to the Solidarity Unemployment Fund and limited to five payments for permanent contracts and three for fixed-term contracts, and subject to maximum and minimum values per month established by the Law. - b) Temporary suspension by mutual agreement: Eligible workers and payments are the same as in (a). - c) Temporary reduction of working hours by mutual agreement: - Employers may reduce working hours by up to 50%. - Workers with a permanent contract: at least 10 continuous or discontinuous contributions; fixed contract: 5 continuous or discontinuous contributions in the last year and the last two with the same employer during the two months before reduction. - Workers receive remuneration proportional to hours worked and an additional supplement charged to unemployment insurance, which could be up to 25 percent of their remuneration with a maximum of $225,000 CLP per month. - Note: The reduction of working hours measure was not simulated due to lack of information to replicate criteria in the micro-data. ### Emergency Family Income (Ingreso Familiar de Emergencia, IFE) - The most generous direct cash transfer; modified multiple times after payments started. - Initially intended as 3 monthly payments with decreasing amounts (85 percent and 70 percent in second and third months). From second payment, coverage expanded to 80 percent of most vulnerable by Socioeconomic Emergency Indicator (ISE), amount increased, and a flat scheme of four payments was provided. Subsequently extended with two additional months where amounts equaled 70 percent and 50 percent of the second payment amount respectively. Eligibility Criteria for the First Payment and Amount Received: - d) Households with no formal income, belonging to the 90 percent most vulnerable according to the Household Social Registry (Registro Social de Hogares) and the 60 percent most vulnerable according to the ISE. - e) Households with partially no formal income, belonging to the 90 percent most vulnerable according to the RSH and the 40 percent most vulnerable according to the ISE. These households received 50 percent of the benefit. - Table A2.1. Amount Received by Beneficiary Households During the First Month (In Chilean Pesos), According to Household Size - Household size — Eligibility criteria (a) — Eligibility criteria (b) - 1 — $65,000 — $32,500 - 2 — $130,000 — $65,000 - 3 — $195,000 — $97,500 - 4 — $260,000 — $130,000 - 5 — $304,000 — $152,000 - 6 — $345,000 — $172,500 - 7 — $385,000 — $192,500 - 8 — $422,000 — $211,000 - 9 — $456,000 — $228,000 - 10 or more — $494,000 — $247,000 Eligibility Criteria from Second to Sixth Payment and Amount Received: - a) Households with no formal income, belonging to the 90 percent most vulnerable according to the RSH and the 80 percent most vulnerable according to the ISE. These households received: - 100 percent of the benefit for the second, third, and fourth payments. - 70 percent of the benefit for the fifth payment. - 55 percent of the benefit for the sixth payment. - b) Households with partially no formal income below the amount received by households in (a) belonging to the 90 percent most vulnerable according to the RSH and the 80 percent most vulnerable according to the ISE. These households received the difference between the amount received by households in (a) and their current household income. The amount received was set at least to 25,000 Chilean pesos per member. - c) Households belonging to the 80 percent most vulnerable according to the ISE and that have at least one member over 65 years who received either Basic Old Age Pension (Pension Básica Solidaria) or Basic Pension Contribution (Aporte Previsional Solidario) or Basic Disability Pension (Pension Básica Solidaria de Invalidez) regardless of age. These households received $100,000 CLP in the second, third, and fourth payments per household member that fulfilled the criteria; and received $70,000 CLP and $55,000 CLP in the fifth and sixth payment, respectively. - Table A2.2. Amount Received by Beneficiary Households from Second to Sixth Payment (In Chilean Pesos), According to Household Size (Eligibility criteria (a)) - Household size — (second to forth payment) — (fifth payment) — (sixth payment) - 1 — $100,000 — $70,000.0 — $55,000 - 2 — $200,000 — $140,000.0 — $110,000 - 3 — $300,000 — $210,000.0 — $165,000 - 4 — $400,000 — $280,000.0 — $220,000 - 5 — $467,000 — $326,900.0 — $256,850 - 6 — $531,000 — $371,700.0 — $292,050 - 7 — $592,000 — $414,400.0 — $325,600 - 8 — $649,000 — $454,300.0 — $356,950 - 9 — $705,000 — $493,500.0 — $387,750 - 10 or more — $759,000 — $531,300.0 — $417,450 ### Middle-Class Benefit (Bono Clase Media) - One-off benefit to support middle class families whose formal incomes were substantially affected. - Eligibility and amounts: - Salaried workers, self-employed, and individual entrepreneurs with wages before the pandemic between $400 thousand and $2 million CLP, and who either lost their jobs or suffered at least a 30 percent reduction in their formal income. - Benefit amount ranged between $100,000 and $500,000 CLP depending on salary before the pandemic; lower pre-crisis salary → higher amount received. - Table A2.3. Amount Received by Beneficiaries According to Income Brackets (in Chilean Pesos) - Income brackets [$400,000 - $1,500,000] — Amount $500,000 - Income brackets ($1,500,000 - $1,600,000] — Amount $400,000 - Income brackets ($1,600,000 - $1,700,000] — Amount $300,000 - Income brackets ($1,700,000 - $1,800,000] — Amount $200,000 - Income brackets ($1,800,000 - $2,000,000] — Amount $100,000 ### Christmas COVID Benefit (Bono COVID Navidad) - One-off benefit targeted to households who benefited from the sixth payment of the Emergency Family Income (IFE). - Eligibility and amounts: - Automatically delivered to households who received the sixth IFE payment. - Eligible households living in districts quarantined during the last week of November (from November 24th to November 30th) received $55,000 CLP per household member. - Eligible households living in districts not quarantined received $25,000 CLP per household member. - Districts quarantined during the last week of November included selected comunas in regions Biobío, Araucanía, Los Ríos, Los Lagos, and Magallanes (listed in source content). ### Minimum Wage Guarantee (Subsidio Ingreso Mínimo Garantizado) - Conceived in response to October 2019 social unrest; payments started in May 2020 and included in COVID-19 response package. - Targeted to full-time employees working more than 30 hours and up to 45 hours per week to receive a net salary equal to $300,000 CLP. - Eligibility criteria and amount received: - Salaried workers with a written contract eligible if gross wage was lower than $384,363 CLP and they worked more than 30 hours and up to 45 hours a week. - Eligibility restricted to workers in households classified within the 90% most vulnerable according to the Household Social Registry. - Eligible workers received the difference between $300,000 CLP and their current net salary, with a maximum net payment of $41,092 CLP for those who had the former minimum wage. ### Appendix III. Sensitivity to Modeling Assumptions — Key Findings - Overall: Poverty estimates are generally not highly sensitive to key modeling assumptions; qualitative conclusions remain unchanged when parameters adjusted. - Baseline assumptions in main estimates: - Wage losses assumed: salaried workers 30 percent, non-salaried workers 50 percent. - Exclusion error rate set at 10 percent. - Pass-through rate of GDP to household income assumed 80 percent for projections. - Table A3.1. COVID-19 + mitigation estimates (selected figures; percent of population) - CASEN 2017: International poverty ($5.5 USD 2011 PPP) 3.6; National poverty 8.6; Vulnerable ($5.5-US$13 2011 PPP) 29.5; Middle-class (US$13-US$70 2011 PPP) 61.7; Gini coefficient 44.4. - Estimation for 2019: International poverty 3.3; National poverty 8.1; Vulnerable 27.8; Middle-class 63.3; Gini coefficient 44.5. - COVID-19 + mitigation (main text): International poverty 3.3; National poverty 12.2; Vulnerable 39.2; Middle-class 53.3; Gini coefficient 44.3. - Panel B: Sensitivity to percentage of wage losses (salaried / non-salaried) - Low scenario (10 and 25 percent): International poverty 2.8; National poverty 10.1; Vulnerable 36.1; Middle-class 56.5; Gini coefficient 44.1. - High scenario (50 and 75 percent): International poverty 4.4; National poverty 15.0; Vulnerable 41.5; Middle-class 50.2; Gini coefficient 44.7. - Panel C: Sensitivity to exclusion error rate - 5 percent exclusion error: International poverty 3.0; National poverty 11.9; Vulnerable 39.5; Middle-class 53.5; Gini coefficient 44.2. - 0 percent (perfect targeting): International poverty 2.8; National poverty 11.6; Vulnerable 39.6; Middle-class 53.6; Gini coefficient 44.1. - Note: With perfect targeting, international poverty would be 2.8 percent, about 0.5 percentage point below the main-text estimate; national poverty would still have increased by about 3.5 percentage points. - Table A3.2. Sensitivity of 2021–2023 poverty projections to pass-through assumption (percent) - Panel A (main text; pass-through 80%, neutral distributional effects): - National poverty: 2019 8.1; 2020e 12.2; 2021f 10.4; 2022f 9.2; 2023f 8.4. - International poverty: 2019 3.3; 2020e 3.3; 2021f 2.7; 2022f 2.3; 2023f 2.1. - Panel B (sensitivity to 100% GDP growth pass-through rate): - National poverty (2021f–2023f): 9.9; 8.5; 7.6. - International poverty (2021f–2023f): 2.5; 2.1; 1.8. - Comparative assessment: - Offsetting effects of COVID-19 mitigation measures in Chile appear comparatively strong versus several other countries in the region. - Example: Uruguay simulated mitigation reduced poverty by 1.1 percentage points, compared to 5.1 percentage points in Chile (comparison caveat: modeling choices may differ across countries). *Source: Appendix II. Policy Measures and Appendix III. Sensitivity to Modeling Assumptions (from the supplied content).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1chlea2021002.pdf_