Chilean legislators gave final approval to the measure despite the government’s opposition © REUTERS

President Sebastián Piñera is expected to reluctantly sign into law an amendment to Chile’s constitution that allows pensioners to withdraw 10 per cent of their savings, which could rattle markets as cash-strapped citizens rush to withdraw as much as $20bn from private funds.

The withdrawals could deal a blow to state finances already hammered by the pandemic and send a disturbing signal to investors who worry that populism may be taking root ahead of a historic constitutional referendum due in October.

The law sailed through congress with support from numerous lawmakers from the centre-right ruling coalition. It won final approval from the lower house on Thursday with a two-thirds majority in a session where emotions ran high, with some lawmakers chanting “no more AFPs”, a reference to pension administrators, known as AFPs.

The development is a stinging defeat to Mr Piñera’s unpopular government. Urging its congressional representatives to vote against the bill, the government argued it was preferable to support citizens with state subsidies — but so far those measures have been criticised as inadequate.

“There has been a poor response from the government in addressing the social crisis caused by Covid-19,” said Andras Uthoff, a Chilean pensions expert who sat on an official committee charged with reviewing the system.

While the change will damage savings and future pensions, “the people need it,” he said. “It certainly further weakens the fundamentals of the system and enhances the need for a new look at the social protection system in Chile as well as the pension system.”

Pensions reform was one of the central demands of the protests that rocked Chile last year, since the pioneering system that has been widely copied around the world now provides meagre payouts, with most pensioners receiving less than the minimum wage.

Although the president has the right to veto the law, analysts said Mr Piñera would risk triggering a fresh wave of protests, with 83 per cent of Chileans supporting the amendment, according to a recent poll.

The move represents the first big crack in what had been held up as a pillar of the Chilean economic success story. Chile was the first country to move to private pensions in the early 1980s during the dictatorship of General Augusto Pinochet with a system designed by Jose Piñera, the president’s brother.

Chile’s private pension funds, which manage around $200bn, have helped to fuel the country’s stellar economic growth in recent decades, turning one of the poorest countries in the region into one of the richest.

Fernando Larrain, director-general of the association of pension administrators, said the potentially abrupt and destabilising withdrawal of as much as $20bn was not only regressive but a concern given that Chile will depend on private investment for a solid economic recovery next year. The economy is projected to contract by 6-7 per cent in 2020. 

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