Saturday, April 22, 2017

Has IMF missed the white noise in world GDP growth projections?

On Thursday, April 18, IMF launched chapter 1 of World Economic Outlook (WEO), one of its key anchor publications, with world GDP growth projections, where IMF forecast global growth of 3.5 percent for this year, and 3.6% for 2018. As we look at this and past IMF WEO publications, taking WEOs after the 2009 economic crisis, there appears to exist a happy bias, where world GDP growth projections carry an upward bias.

The theory of rational expectations was originally proposed by John F. Muth (1961) [1], which later became an anchor idea in economic modeling when it was used by neoclassical economists such as Robert Lucas, Jr. [2], Edward C. Prescott, Thomas J. Sargent, Michael R. Darby, Finn E. Kydland, Lawrence H. Summers, and Neil Wallace. [3] This is a hypothesis of economic science which states that predictions about the future value of economically relevant variables made by rational agents should not be systematically erroneous and that the errors are random, uncorrelated and with zero mean (white noise).

This idea on how to model expectations, known as the rational expectation hypothesis, accepts that the expectations of economic agents may be individually erroneous, but correct on average. Thus, although the future is not entirely predictable, it is assumed that agents' expectations are not systematically skewed and that they use all relevant information to form their expectations about economic variables, including information about past mistakes.

IMF world GDP growth projections serve many important purposes for policy makers in member countries, for the private sector and the public in general. To the extent that these projections may affect policies, economic and investment decisions, they may affect the eventual economic outcome. Predicting the economy is complex, it is an art more than a science, and the only certainty is uncertainty. And, in this respect, models should be frequently revised and adjusted so projections only carry a white noise and not a bias.

We know that predicting the economy’s next few years is one of the areas in which economists fail considerable. But, the value of better predictions is enormous. For example, if decision makers have better forecasts that a recession is on the corner, they might prepare in a better way to weather the storm, and eventually take measures in advance to counteract or minimize the recession, and ease others and save millions from adversity and unemployment. The aim of having white noises in economic forecasting should be an objective in top notch economic modeling.

The good news is that if we believe in rational expectations, the market already discounts any happy bias, and make its own assessments of the accuracy of the different world GDP projections.

[1] John F. Muth. (1961). "Rational Expectations and the Theory of Price Movements", Econometrica 29, pp. 315–335.
[2] Lucas, Robert (1972). "Expectations and the Neutrality of Money". Journal of Economic Theory. 4 (2): 103–24.
[3] Edited by Preston J. Miller (1994). The Rational Expectations Revolution: Readings from the Front Line. The MIT Press. ISBN: 9780262132978 and ISBN: 9780262631556.

Thursday, April 13, 2017

40 Years of IAEE: Energy Policy and Geopolitical Reflections

No+ Taxes: why the pension system reform should not be set aside from the private individual capitalization system

As I stated in two previous columns, "NO+ PAYGO: why is the pay-as-you-go system unviable today" and "Yes+ AFP (Private Pension Fund Managers): why the individual capitalization system is the right path", the year '80 Chile made the right decision to replace the pension system based on a pay-as-you-go mechanism for an individual capitalization mechanism administered by specialized private companies.

The current government has announced changes to the current pension system, where it proposes to raise the individual contribution by an additional 5% and that to be administered by a new autonomous state entity. From the additional 5%, 2 percentage point would go to a collective savings insurance and the other 3 percentage points to the individual workers' accounts.

Creating a new state entity to manage the additional contribution increases the system's operating costs and decreases the expected returns on the fund to which the contributors can aspire.

The state has shown not to have competencies to efficiently manage the resources and less to obtain a greater profitability of them. For example, in the last three years the average annual real return obtained by the funds managed by the AFPs is 4.93% on a simple average of funds A to E (A 5.95%, B 5.47%, C 5.15%, D 4.35%, E 3.75%), which compares favorably with the estimated real profitability of 0.16% per annum achieved by the Economic and Social Stabilization Fund (FEES), or the estimated real profitability of 1.44% of the Pension Reserve Fund (FRP), which started in 2007. Even more, during the last three years, the small contributions that the authority has made to the FRP have been financed with withdrawals from the FEES. Beyond the conservative investment strategies of the FEES and the FRP, their expected return is significantly lower than the ones achieved by the more conservative funds administered by the AFPs, Fund D or E.

The value of workers' funds administered by the AFPs in March reached CL $ 123,414,480 million, increasing by CL $ 13,159,135 million in one year, due to the contributions and profitability obtained. For its part, the FEES, which started in 2007, since its creation has received contributions of US $ 21,765.71 million, and has suffered withdrawals of US $ 10,852.81 million. And, today, its value reaches US $ 14.048 million. Of the total withdrawals that have been made from FEES, US $ 9,277.71 million were withdrawn in 2009, the year of presidential elections. In the case of the Pension Reserve Fund, it now accumulates US $ 9 billion, and by law as of this year, it allows the Treasury to withdraw about US $ 600 million to finance the Solidary Pension Pillar (basic solidarity pension -PBS- and social security contributions -APS-). And, where, until the year 2016, the resources to finance the payment of these benefits were contemplated in the fiscal budget. It remains to be seen how the Ministry of Finance will manage this additional source of funding to mobilize additional resources in a year of presidential elections.

The quote of an additional 2% that would go to collective savings insurance is a new labor tax, a regressive tax. And if it materializes, it will affect the workers, the middle class, and all those who depend on a living wage. The announcement made by the authority, emphasizes the 5% increase in workers contribution. But, says nothing about increasing the state's contributions to the Solidarity Pillar, and on to the chances to finance that contribution by reducing public spending, or on making a more efficient use of government revenues.

The additional contribution of 5% must go entirely to the individual capitalization accounts of the workers, these resources must be heritable, and individually are the workers who must decide which pension fund administrator must manage their resources. The creation of a new autonomous state entity would only increase the costs of the system, and will not generate higher returns than those managed by Pension Fund Administrators, specialized in portfolio management.

Achieving higher levels of efficiency, competition, and delivering greater pensions to workers are not resolved with the creation of a new autonomous state entity. If not rather, these objectives are achieved by increasing the competitive spaces between the AFPs, and leading the economy to a path of sustained economic growth, generating more and better jobs in the formal sector; and not with policies that slow growth and lead to greater informality and precariousness of the labor market, which will eventually have an impact on a greater demand for social assistance over the state.

The history of Chile has shown that it is easy and tempting for those who are leading the state apparatus to use the contributed resources from citizens and taxpayers, and history has also shown that on uncountable occasions they have not been good at administering those resources on the benefit of the governed.

I leave a question to comment: does the proposal of the authority imply a tax increase?

No+ Impuestos: por qué la reforma al sistema de pensiones no se debe apartar del sistema privado de capitalización individual

Como afirmé en dos columnas anteriores, “NO+ Reparto: por qué es inviable el sistema de reparto hoy” y “SI+ AFP: por qué el sistema de capitalización individual es la ruta correcta”, el año ’80 Chile tomó la decisión correcta de sustituir el sistema de pensiones basado en un mecanismo de reparto por uno de capitalización individual administrado por empresas especializadas privadas.

El actual gobierno ha anunciado cambios al actual sistema de pensiones, donde propone subir la cotización individual en un 5% adicional y que ésta sea administrada por una nueva entidad estatal autónoma. Ese 5% adicional iría en un 2% a un seguro de ahorro colectivo, y el otro 3% a las cuentas individuales de los trabajadores.

El crear una nueva entidad estatal para administrar la cotización adicional, aumenta los costos de operación del sistema y disminuye los retornos esperados sobre el fondo al que pueden aspirar los cotizantes.

El estado ha mostrado no tener competencias para administrar de manera eficiente los recursos y menos en obtener una mayor rentabilidad de ellos. Por ejemplo, en los últimos tres años, la rentabilidad real anual promedio obtenida por los fondos administrados por las AFP es de 4,93% promedio simple de los fondos A a E (A 5,95%; B 5,47%; C 5,15%; D 4,35%; E 3,75%), lo que se compara favorablemente con la rentabilidad real estimada de 0,16% anual lograda por el Fondo de Estabilización Económica y Social (FEES), o la rentabilidad real estimada de 1,44% del Fondo de Reserva de Pensiones (FRP), que partió el 2007. Aún más, durante los últimos tres años, los pequeños aportes que la autoridad ha realizado al FRP han sido financiados con retiros del FEES. Más allá de las estrategias de inversión conservadoras del FEES y del FRP, su retorno esperado es significativamente menor que los fondos más conservadores administrados por las AFP, fondo D o E.

El valor de los fondos de los trabajadores administrado por las AFP, en marzo llegó a los 123.414.480 millones, aumentando en $ 13.159.135 millones en un año, por las cotizaciones y la rentabilidad obtenida. Por su lado, el FEES, que partió el año 2007, desde su creación ha contado con aportes por US$ 21.765,71 millones, y ha sufrido de retiros por US$ 10.852,81 millones. Y, hoy, su valor alcanza a los US$ 14.048 millones. Del total de retiros que se han efectuado desde el FEES, US$ 9.277,71 millones fueron retirados el año 2009, año de elecciones presidenciales. En el caso del Fondo de Reserva de Pensiones, este hoy acumula US$ 9 mil millones, y por ley a partir de este año permite al Fisco retirar cerca de US$ 600 millones para financiar el Pilar Solidario de Pensiones (pensiones básicas solidarias -PBS- y aporte previsional solidario -APS-). Y, donde, hasta el año 2016, los recursos para costear el pago de estos beneficios estaban contemplados en el presupuesto fiscal. Hoy, está por verse cómo manejará el Ministerio de Hacienda de esta fuente adicional de financiamiento que permitirá movilizar recursos adicionales en un año de elecciones presidenciales.

La cotización de un 2% adicional que iría a un seguro de ahorro colectivo es un nuevo impuesto al trabajo, un impuesto regresivo. Y, de concretarse, afectará en mayor medida a los trabajadores, a la clase media, y a todos los que dependen de un salario para vivir. El anuncio presentado por la autoridad, enfatiza el aumento del aumento de la cotización de un 5% adicional, pero nada dice respecto de aumentar los aportes del estado al Pilar Solidario, y financiar ese aporte disminuyendo el gasto público o haciendo un uso más eficiente de los recursos.

La cotización adicional de 5% debe ir íntegramente as las cuentas de capitalización individual de los trabajadores, estos recursos deben ser heredables, e individualmente son los trabajadores quienes deben decir que administradora de fondos de pensiones debe administrar sus recursos. La creación de una nueva entidad estatal autónoma sólo aumentaría los costos del sistema, y no va a generar mayores rentabilidades que las que pueden entregar las Administradoras de Fondos de Pensiones especializadas en la administración de carteras.

El lograr mayores niveles de eficiencia, competencia, y entregar mayores pensiones a los trabajadores no se resuelven con la creación de un nuevo ente estatal autónomo. Si no más bien, estos objetivos se logran aumentando los espacios de competencia entre las AFP, y llevando a la economía por una senda de crecimiento económico sostenido, de generación de más y mejores empleos en el sector formal; y no con políticas que frenan el crecimiento y llevan a una mayor informalidad y precariedad del mercado laboral, lo que finalmente va a repercutir en una mayor demanda de asistencia social sobre el estado.

La historia de Chile ha demostrado que es fácil y tentador para quienes están liderando el aparato estatal disponer de los recursos de terceros, y la historia también ha demostrado que en un sinnúmero de ocasiones no han sido buenos en administrar esos recursos en beneficio de los gobernados.

Les dejo una pregunta para comentar: ¿conlleva la propuesta de la autoridad un alza de impuestos?

Friday, April 7, 2017

Yes+ AFP (Private Pension Fund Managers): why the individual capitalization system is the right path

As I stated in the previous column, NO+ PAYGO: why is the pay-as-you-go system unviable today, the year '80 Chile made the right decision to replace the pension system based on a pay as you go system for an individual capitalization mechanism.

In the present system, a worker contributes 10% of his remuneration to his individual capitalization account, resources that belong to him and that can be inherited by his spouse and children in case of death (in the old PAYGO system, the contribution rate was generally more than 20%). In the current system, when someone does not get enough savings in his account, the State contributes with the solidarity pillar to guarantee a minimum pension.

Since its inception, the average annual return of the private pension funds has been 8.21% real (Fund C from July 1981 to February 2017), which means multiplying $ 1 invested in 1981 by more than 15 times in real terms today.

What do the results of the current system depend on? Several factors: the contribution that people make to their account during their active period (the "gaps" and the number of years without contributions have a very negative impact on the amount of pension a person receives later); the good management of the fund made by the AFPs (Spanish acronyms for the private pension fund specialized management companies – Administradoras de Fondos de Pensiones – or AFP); on the decisions that people make regarding the AFP they decide that will manage their fund, and in which fund they will put their money (A, B, C, D, and E; where the A fund is the more riskier with higher expected return and a larger share of investments made in stock, and the E is the lest riskier with all its investments in bonds and government debt bills); and the dynamism of the economy (the more the economy growth, the more opportunities for formal employment are generated, what increases salaries as well as improves the profitability of the pension fund).

Today the discussion is about raising the contribution by an additional 5%, which is part of the gross remuneration to be paid by the employer. The professional and specialized administration that has shown the AFP, who have obtained the aforementioned profitability, justifies that they assume the management of the 5% of additional contributions.

It is not appropriate for that 5% of additional contribution not to go entirely to the worker's' individual capitalization accounts, because regardless of how is camouflage it is part of the gross remuneration that employers will pay to their workers, and it will be discounted from the gross income to determine the workers net income.

Any mechanism that implies that the 5% of additional contribution does not reach the worker's individual capitalization account, can be read as a hidden tax hike.

In addition, it is very important to move ahead in generating greater competition in the system, which together with the search for spaces to reduce commissions, make it possible to improve the efficiency and profitability of the fund by the investment management companies.

Improvements in the system must advance on how to improve workers' pensions. There are no magic formulas. The most important variables to be analyzed are the increase in the amount of the contribution and the revision of the retirement age, seeking to solve the problems of gaps in contributions and to get people to have a greater number of years with contributions along with their life.

The Chilean pension system is not broken, and on the contrary, the funds of the workers - US $ 170 billion invested in Chile and abroad - are highly solvent.

I leave a question to comment: How do you think it could be increased the competition in the AFP?

(Source: Clase Ejecutiva, Emol)

SI+ AFP: por qué el sistema de capitalización individual es la ruta correcta

Como afirmé en la columna anterior, NO+ Reparto: por qué es inviable el sistema de reparto hoy, el año ’80 Chile tomó la decisión correcta de sustituir el sistema de pensiones basado en un mecanismo de reparto por uno de capitalización individual.

En el actual sistema, un trabajador contribuye con el 10% de su remuneración para su cuenta de capitalización individual, recursos que le pertenecen y que pueden ser heredados por su cónyuge e hijos en caso de fallecimiento (en el antiguo sistema de reparto, la tasa de cotización, por lo general superaba el 20%). Cuando alguien no logra suficientes ahorros en su cuenta, el Estado aporta con el pilar solidario para que obtenga una pensión mínima.

Desde su creación, la rentabilidad promedio anual de los fondos de pensiones ha sido de 8,21% real (Fondo C desde julio 1981 a febrero de 2017), lo que significa multiplicar $ 1 invertido en 1981 por más de 15 veces en términos reales al día de hoy.

¿De qué dependen los resultados del sistema actual? De varios factores: del aporte que las personas hagan a su cuenta durante su etapa activa (las “lagunas” y el número de años de cotización inciden muy negativamente sobre el monto de las pensiones); de la buena gestión del fondo por parte de las AFP; de las decisiones que las personas tomen respecto de la AFP y fondo (A, B, C, D, y E) elegidos, y del dinamismo de la economía (si hay crecimiento, se generan más oportunidades de empleo formal, las remuneraciones aumentan, y mejora la rentabilidad del fondo de pensiones).

Hoy la discusión está en aumentar la cotización en un 5% adicional, que es parte de la remuneración bruta que deberá pagar el empleador. La administración profesional y especializada que han mostrado las AFP, que han obtenido la citada rentabilidad, justifica que sean ellas quienes asuman la gestión del 5% de cotización adicional.

No corresponde que ese 5% no vaya íntegramente a las cuentas de capitalización individual de los trabajadores, porque independientemente de cómo se disfrace, es parte de la remuneración bruta que los empleadores pagarán a sus trabajadores, y será descontada al momento de determinar su renta líquida.

Otro mecanismo que implique que ese 5% de cotización adicional no llegue a la cuenta de capitalización individual del trabajador, puede ser leído como un alza de impuestos encubierta.

De manera adicional, es muy importante avanzar en generar mayor competencia, que junto a buscar espacios que permitan reducir las comisiones, hagan posible mejorar la eficiencia y rentabilidad de la gestión de las inversiones.

Los perfeccionamientos del sistema deben avanzar en cómo mejorar las pensiones de los trabajadores. No hay fórmulas mágicas. Las variables más importantes a analizar son el aumento en el monto de la cotización y la revisión de la edad de jubilación, buscando subsanar los problemas de lagunas de cotizaciones y de lograr que las personas cuenten con un mayor número de años con cotizaciones a lo largo de su vida.

El sistema de pensiones chileno no está quebrado, y, por el contrario, los fondos de los trabajadores — US$ 170 mil millones invertidos en Chile y el extranjero— cuentan con gran solvencia.

Les dejo una pregunta para comentar: ¿Cómo cree Ud. que podría aumentar la competencia en las AFP?