NO+ PAYGO: why is the pay-as-you-go system unviable today

(Source: Clase Ejecutiva, Emol)

The low birth rate and the increase in life expectancy explain why the pay-as-you-go system would not improve pensions.

In 1980, Chile made the right decision to replace the pension system based on a pay-as-you-go (PAYGO) mechanism, with a fully funded individual capitalization system run by private sector pension funds. In a pay-as-you-go system, the active population pays contributions with which pensioners' pensions are paid, and in an individual capitalization, the employee's contributions made to their individual savings account is what builds the fund that will be used to finance their pension.

The decision to replace the pay-as-you-go system with an individual capitalization system responded to the unfeasibility of sustaining it in a context of declining fertility rates, and an increasingly healthy population with increasing life expectancies, what would invariably condemn the pay-as-you-go system the collapse.

The functioning of the pay-as-you-go system is strongly influenced by demographic changes. In Chile, there is a strong drop in the fertility rate. In 1960, a woman had an average of 5.6 children, in 2012, only 1.83. There is also a strong increase in life expectancy. At the beginning of the 80s, the latter reached 71 years, and today it has increased to more than 80 years.

In theory, the pay-as-you-go system could work and provide pensions similar to the salary that was received at the time of retirement. For this to happen, however, the growth of the labor force is expected to outpace those who are retiring, or that strong economic growth leads to higher wages in a way that active workers can pay higher contributions to finance the pensioners' pensions.

If today the contribution rate of an active person is 10% of his salary, in a pay-as-you-go system for that person to receive a pension that is equivalent to his salary, requires that there are 10 active people with a similar salary, where each have to contribute 10% to finance the pension of those who have already retired.

In 1980 people aged between 20 and 65 were in a ratio of 10 to 1 compared to those over 65. But in 2015, Chileans between the ages of 20 and 65 are at a rate of 6 to 1 compared to those over 65.
If in addition, the projections are that life expectancy continues to increase and the fertility rate will decrease somewhat, then the proportion of people over the age of 65 will increase even more than those between 20 and 65. By 2040, it is projected that this ratio will be less than 3 to 1.

And so, the burden on the working population, in terms of paying with a proportion of their salaries the contributions needed to the financing of retirees' pensions, will not be sustainable, and will lead to diminishing pensions; except the case that the system and the country increases its debt, or sells parts of its assets to finance the growing deficit that, due to the low number of contributors and an increasing number of beneficiaries, is being created in the economy.

I leave you with a question to comment: With the proportion of workers between the ages of 20 and 65 decreasing more and more, is it the right decision the tying the pensions to the contributions that can be made by active workers?

(Source: Clase Ejecutiva, Emol)

NO+ Reparto: por qué es inviable el sistema de reparto hoy

(Fuente: Clase Ejecutiva, Emol)

La baja natalidad y el aumento en la expectativa de vida explican por qué el sistema de reparto no mejoraría las pensiones.

En 1980, Chile tomó la decisión correcta de sustituir el sistema de pensiones basado en un mecanismo de reparto, por uno de capitalización individual. En un sistema de reparto, la población activa paga cotizaciones con las que se pagan las jubilaciones de los pensionados, y en uno de capitalización individual, los activos contribuyen con ahorros para construir un fondo propio que será usado para financiar su pensión.

La decisión de reemplazar el sistema de reparto por uno de capitalización individual respondió a la inviabilidad de sostenerlo en un contexto de tasas de fertilidad decrecientes, con una población cada día más sana y con expectativas de vida crecientes, lo que invariablemente llevaría al colapso de las cajas de previsión.

El funcionamiento del sistema de reparto está fuertemente influenciado por los cambios demográficos. En Chile hay una fuerte caída en la tasa de fertilidad. En 1960, una mujer tenía en promedio 5,6 hijos, en 2012, solo 1,83. También hay un fuerte aumento en las expectativas de vida. A inicios de los ´80, esta última llegaba a 71 años, y hoy ha aumentado a más de 80 años.

En teoría el sistema de reparto podría funcionar y entregar pensiones similares a la renta que se tenía al momento del retiro. Sin embargo, para que ello ocurra, se requiere que el crecimiento de la población activa supere al de aquellos que se están retirando, o que las tasas de crecimiento de la economía y de remuneraciones sean elevadas para que los trabajadores activos puedan contribuir con cotizaciones mayores.

Si hoy la tasa de cotización de una persona activa es del 10% de su salario, en un sistema de reparto para que ella pueda recibir una pensión equivalente a su sueldo, se requiere que existan 10 personas activas con un salario similar que contribuyan cada una con un 10% para financiar la pensión de quien ya se ha retirado.

En 1980 las personas con edades entre 20 y 65 años estaban en una razón de 10 a 1 respecto de quienes tienen más de 65 años. Pero, en 2015,  los chilenos entre 20 y 65 años están en una razón de 6 a 1 respecto de las mayores de 65 años.

Si, además, las proyecciones son de que las expectativas de vida sigan aumentando y la tasa de fertilidad disminuya algo más, se dará que la proporción de personas con edades por sobre los 65 aumentará aún más respecto de los que tienen entre 20 y 65. Para el año 2040, se proyecta que dicha razón será de menos de 3 a 1.

Y, con ello, la carga para lo población activa, en términos de contribuir con sus cotizaciones al financiamiento de las pensiones de los retirados, no será sostenible, y llevará a pensiones cada vez menores; excepto, que el sistema y el país se endeude, o desprenda de patrimonio, para financiar el déficit creciente que, por el bajo número de cotizantes y un número creciente de beneficiados, se va creando en la economía.

Les dejo una pregunta para comentar: Con una proporción de trabajadores entre 20 y 65 años que será cada vez menor, ¿es la decisión correcta amarrar las pensiones a las cotizaciones que puedan aportar los activos?

(Fuente: Clase Ejecutiva, Emol)

How did the US to contribute to global energy security?

Source: El Mercurio 28 de Marzo 2017, page B10

The technological innovation allowed the rebirth of the oil industry, and with that, it was able to stop price hikes.

Regardless of the most favorable scenario, Chile must continue to pursue cost-effective solutions to improve its energy security.

FEWER IMPORTS

The United States is one of the largest energy consumers in the world and was the first for many decades. At the beginning of the 1960s, it accounted for 35% of the world's primary energy consumption, and now 17.5%, surpassed by China which accounts for 23% of global demand. However, in oil and gas, the US remains as the world's largest consumer with almost 20% and 23% respectively, and is the third largest consumer of coal, with 10%.

China, for its part, accounted for 13% of global oil demand in 2015, compared to 3.5% in 1990, and is the largest consumer of coal, with 50% of world consumption, seconded by India with 11%. Regarding CO₂ emissions, China accounts for 27.3% of total emissions and US 16.4%.

The US along with having a high level of energy consumption has also been a net importer, particularly of oil and natural gas, having imported up to 67% of the oil it consumes in the decade of 2000, a figure that now comes to 35%. This energy often comes from regions politically unstable and exposed to wars and conflicts.

The US decline in the percentage of oil imports in its total oil consumption is due, marginally, to a small reduction in domestic consumption, but above all to a significant increase in local liquid production from 6,785 thousand barrels per days in 2008 to 13,800 thousand barrels per days in 2015. In 2016, unconventional oil production accounted for more than 50% of domestic production.

How did they do it? It has been the technological innovation in the oil industry, in horizontal drilling and rock fracturing technology that began to bear fruit since the middle of the last decade, and which was followed by significant increases in productivity.

Depending on the region, the average maximum output of a well increased from about 100 barrels a day in 2007 to over 1,000 barrels a day in 2017. Thus, today a new unconventional well produces the same as was achieved with ten of these wells in 2007. This has led to significant cost reductions that have made the United States unconventional oil industry very resilient to lower oil price levels, and, at the same time, has acted as a break to new price hikes, despite the lower production quota agreed between the OPEC countries at the end of 2016.

THE NATURAL GAS

A similar situation has occurred with the production of natural gas, which has increased from 510 billion cubic meters in 2005 to 770 billion in 2015, generating surpluses that have open the door to US LNG exports.

The significant technological development in the oil and gas industry not only shook the US energy industry but also global energy markets, including renewables.

Another element that has been essential to the success of the US oil industry is that oil and gas are usually privately owned, with small landowners who partner with corporations to exploit resources, rather than being Government ownership as is the case in many countries.

The increase in oil and gas production and the lifting of export restrictions on US crude in December 2015 has led to exports of crude oil, refined products, and natural gas (LNG) to increase and to reach more countries.

According to projections from the US Energy Information Agency (EIA), by the end of this decade, the country will become a net exporter of natural gas. Something that was unthinkable a decade ago, after the country's consumption and dependence on imported oil increased while local production fell.

The world's largest economy has been and will be, for many years, a relevant player in global energy markets. The energy balance of the US, its policy and technology have led, among other things, to those regions that are abundant in oil and gas resources, often to see in the United States a stable market where they sell their products; other energy importing countries have also benefited from the greater supply of fuel. And, the technological change has contributed with innovations that have been able to apply in other regions.

WITH TRUMP IN THE WHITE HOUSE

With a new administration in the US federal government, it is important to read the orientation of that country's energy policy, and how it can impact global energy markets and security, international relations, technological change, and on the environment.

Since his arrival in the White House, Donald Trump has issued executive orders and has made announcements about the direction of policies during his term. In addition, on March 16, he submitted to Congress the budget proposal "America First: A Budget Plan to Make America Big Again." It proposes a decrease in the resources of several departments, including Energy (-5.6%), Interior (-11.7%), and the Environmental Protection Agency (-31.4%), all of them agencies that have interference in energy matters.

Of its announcements and executive orders, stand out those that look to give a boost to the economic activity and to take advantage of the country`s abundant energy resources, requesting:

·      Streamline the approval of projects that are of high priority for the country, such as those of energy infrastructure that allow to revitalize the economy activity and reduce energy costs.

·       Restrict new regulations and eliminate others, with the aim of relieving people and companies of regulations that inhibit growth and employment.

·      Review federal water and land use control regulations to facilitate access to energy resources.

·      Review the relevance of environmental protection and project development standards.

·     Review the emission and gasoline consumption standards to be adopted by the automotive industry.

And we expect:

·         Less stringent standards on coal-based power generation.

·        Reduction or elimination of subsidies to renewable energies.

·   In the development of new technologies, efforts would be concentrated on financing technological developments in basic science, at an early stage, canceling programs in which the private sector is better placed to finance research and development.

·        Elimination of preferential conditions that some technologies have regarding the protection of species in danger of extinction.

·         Review of the requirements of minimum percentages of biofuels in gasoline.

·     Reduction of the obstacles that have hampered the development of nuclear energy for electricity generation, seeking to facilitate the development of new technologies (nuclear reactors of smaller size or using thorium as fuel).

·         Revitalization of the development of hydroelectric projects.

·       Development of new infrastructure that would bring Canadian oil to the Michigan and Gulf of Mexico refineries.

·         A decrease in transport subsidies.

In addition, the President would have under analysis the permanence of the United States in the climate change agreement, agreed in Paris at the end of 2015, which establishes commitments to reduce greenhouse gas emissions.

With all the above, an increase in oil, gas, and energy production is expected, which would further lower imports, creating a greater supply of oil and gas in global markets.

HOW DOES IT AFFECT CHILE?

Chile imports about 70% of the energy used, more than 95% of the oil it consumes, and 100% of the liquefied natural gas (LNG) that reaches the Quintero and Mejillones terminals. The country is always very exposed to the vagaries of global energy markets. However, Chile will benefit from US contributions to these markets in the coming years.

A greater global supply of energy coupled with more competition would mean that the price of oil and other fuels will for some time be less influenced by agreements restricting supply from OPEC.

Regardless of the most favorable scenario, Chile must continue to seek cost-effective solutions to improve its energy security, reducing its dependence on what may occur in countries or regions exposed to political instability, and from potential price manipulations which can occur in global markets.

For a competitive Chile, the country must count on an energy matrix that assures reliability of supply, and with energy costs that are a competitive advantage of the country. And in this, Chile cannot renounce to use its main energy resources, within which is the hydroelectricity, and recently the wind and solar energy. These last ones do impose the challenge of requiring other sources to overcome the current limitation of not being able to operate continuously.

Source: El Mercurio 28 de Marzo 2017, page B10

On March 28, President Trump signed the Executive Order "Promoting Energy Independence and Economic Growth," which details the various rules and regulations that need to be revised or eliminated

Cómo lo hizo EE.UU. para contribuir a la seguridad energética global

Fuente: El Mercurio 28 de Marzo 2017, pagina B10

Fuente: El Mercurio 28 de Marzo 2017, pagina B10

El día 28 de Marzo por la tarde el Presidente Trump firmó la Orden Ejecutiva "Promoting Energy Independence and Economic Growth", que entrega el detalles de las distintas normas y regulaciones que deden ser revisadas o eliminadas.

Informal Economy: Is a street vendor an independent worker?

Informal Economy: Is a street vendor an independent worker?

(Source: La Clase Ejecutiva, Emol)

The problems of the informal economy are multiple: no taxes are paid, people have no social security and embeds unfair competition.

What is the informal economy? They are all those legitimate activities that citizens develop illegally, such as exercising trade, setting up an industry, developing transport activities, or building a home. It is not within the informal economy that activities that are directly illegal and harmful, such as drug trafficking and the reduction of stolen species.

Informality is accessed by institutional failures, of the State, where barriers are created that slow or make it very expensive to exercise these legitim activities in a legal way; Or because there is a lack of opportunities in the formal economy, as can occur in a scenario of deceleration with low or zero economic growth, where people do not find or lose their jobs, and are forced to develop informal activities to generate income.

The problems that lead to informality are multiple. On the state side, income is lost because these activities evade the payment of taxes, and people do not have social security, so they often become an additional burden of the state social benefits. On the side of people, they get low levels of income, have restricted access to the formal market for credit or financing, which greatly limits their chances of expanding or increasing their business or activity.

Likewise, those who carry out similar activities, but in the formal economy, face unfair competition, as is the case with established commerce, where they must pay taxes and comply with regulations, certifications, and regulations.

This last week it was known that in Chile the number of independent workers who work in the street exceed 384 thousand, and represent 4.67% of the total employed persons, being the highest figure since there are records in early 2010.

This news shows a daunting panorama of the opportunities that the economy and the labor market are giving, given that there is a growing number of people who do not find work in the formal market, and are forced to go out into the streets to work in very precarious conditions, which is appreciated by observing the sharp increase in street commerce.

The low growth rate of Chile, 1.6% in 2016 (Central Bank), and the drop in investment of -0.8%, which already adds a negative figure for the third consecutive year, responds to a scenario mainly explained by internal factors, since externally the projections of growth from the major economies have gone up.

In order to reverse this slow-growing and job-creating streak, there is an urgent need to improve the business climate, reduce regulations that inhibit investment, slow job creation, and growth. Informal employment, which disguises itself as the euphemism of self-employed workers, is a precarious, non-inclusive employment, and is the result of lack of institutional opportunities and failures as a result of poor public policies.

I leave a question to comment:

Do you think that the informal economy, such as street commerce, is the development path Chile should follow?

(Source: La Clase Ejecutiva, Emol)

Economía informal: ¿un vendedor callejero es un trabajador independiente?

Economía informal: ¿un vendedor callejero es un trabajador independiente?

(Fuente: La Clase Ejecutiva, Emol)

Los problemas que acarrea la economía informal son múltiples: no se pagan impuestos, las personas no tienen previsión social y se produce competencia desleal.

¿Qué es la economía informal? Son todas aquellas actividades lícitas que los ciudadanos desarrollan de manera ilegal, como ejercer el comercio, instalar una industria, desarrollar actividades de transporte, o construir una vivienda. No están dentro de la economía informal aquellas actividades que son derechamente ilícitas, como el comercio de drogas y la reducción de especies robadas.

A la informalidad se accede por fallas institucionales, del Estado, donde se erigen barreras que frenan o hacen muy costoso ejercer dichas actividades lícitas de manera legal; o porque existe una falta de oportunidades en la economía formal, como puede ocurrir en un escenario de desaceleración con bajo o nulo crecimiento económico, donde las personas no encuentran o pierden sus empleos, viéndose obligadas a desarrollar actividades informales para generar ingresos.

Los problemas que acarrean la informalidad son múltiples. Por el lado del Estado, se pierden ingresos porque estas actividades evaden el pago de impuestos, y las personas no cuentan con previsión social, por lo que suelen transformarse en una carga adicional de las prestaciones sociales. Por el lado de las personas, obtienen bajos niveles de renta, tienen restringido el acceso al mercado formal de crédito o financiamiento, lo que limita enormemente sus posibilidades de expandir o ampliar su negocio o actividad.

Asimismo, quienes desarrollan actividades similares, pero desde la economía formal, enfrentan una competencia desleal, como le ocurre al comercio establecido, donde deben pagar impuestos y cumplir con las normas, certificaciones y regulaciones.

Esta última semana se conoció que el número de trabajadores independientes que se desempeñan en la calle superan los 384 mil, y representan un 4,67% del total de personas ocupadas, siendo la cifra más alta desde que hay registros a inicios de 2010.

Esta noticia muestra un panorama desalentador de las oportunidades que está entregando la economía y el mercado laboral, atendiendo a que existe un número creciente de personas que no encuentra trabajo en el mercado formal, y se ven forzadas a salir a la calle para trabajar en condiciones muy precarias, lo que se aprecia al observar el fuerte aumento del comercio callejero.

La baja tasa de crecimiento de Chile, el 1,6% en 2016 (Banco Central), y la caída en la inversión de -0,8%, que suma ya una cifra negativa por tercer año consecutivo, responde a un escenario mayormente explicado por factores internos, dado que externamente las proyecciones de crecimiento han ido al alza.

Para revertir esta racha de bajo crecimiento y generación de empleos, se debe dar urgencia a mejorar el clima de negocios, disminuir regulaciones que inhiben la inversión, frenan la generación de empleos y el crecimiento. El empleo informal, que se disfraza con el eufemismo de trabajadores independientes, es un empleo precario, no inclusivo, y es el resultado de la falta de oportunidades y fallas institucionales como consecuencia de malas políticas públicas.

Les dejo una pregunta para comentar:

¿Crees que la economía informal, como el comercio callejero, es la senda de desarrollo que debe seguir Chile?

(Fuente: La Clase Ejecutiva, Emol)

Vietnam, an economy in transition that seeks to embrace free market ideas

Vietnam, an economy in transition that seeks to embrace free market ideas

(Source: Claseejecutiva, Emol)

After World War II, in 1954 Vietnam was temporarily divided in two, with a promise of democratic elections in 1956 to unify the country, with a communist government in the north and a market-oriented economy government in the south. However, after a grueling war, the country was reunified in 1975 when North Vietnam achieved the withdrawal of US troops and took the control of Saigon, now Ho Chi Minh City.

The nascent Socialist Republic of Vietnam imposed a communist economic system, with significant state participation and a centrally planned economy, and state ownership of major companies.

However, the centrally planned economy model did not live up to expectations and the five-year plan of 1976 proved to be a failure. In 1986, the Communist Party of Vietnam changed its economic policy and introduced reforms similar to those of China. Thus, something already in the quinquennial plan of 1981, but particularly in the one of 1986, the authorities went towards more pro-market reforms.

Since the mid-1980s, Vietnam has enjoyed significant economic growth. Per capita income has increased from approximately US $ 500 in 1980 to US $ 2,150 in 2016, and the country has achieved an average economic growth rate of 6.4% for the period 1985-2015.

Gradually, the authorities have sought to become more integrated into the global economy, for example by joining the Association of Southeast Asian Nations (Asean) in 1995 and the World Trade Organization in 2006, and has also been opening up new spaces for private initiative.

However, today the country is at an important turning point, in which it requires increasing levels of investment, attracting private capital, and increasing the efficiency levels of its companies, which makes it necessary to move forward in structural reforms where the private sector takes a leading role in strategic sectors of the economy.

Its authorities face many and diverse challenges, such as moving quickly to a system of market prices and eliminate subsidies. For this to happen, it is essential to move forward in institutional reforms, where, among others, property rights are properly established and correct price signals are generated that are attractive to bring in the necessary foreign investment to generate more and better jobs.

In Chile, part of the history of the transition and challenges that Vietnam faces are known for us, it is like a déjà vu going back 40 years. And, while they are eager to learn from successful experiences on market-oriented reforms, and where Chile is a very attractive example, in Chile, instead of moving forward trying to improve what we have, we are faced with the fact that some people are pushing to change everything, with foundational reforms, to equations that propose for a greater participation of the State in the economy, and as is well documented, these formulas that did not work and have not worked anywhere in the world.

Vietnam, an economy in transition that seeks to embrace free market ideas

(Source: Claseejecutiva, Emol)