(Bloomberg) — In Latin America’s haven for the wealthy, Uruguayans are poised to decide whether to overhaul their social security system in a controversial $23 billion proposal that overshadows the upcoming presidential election.
Most read from Bloomberg
Voters will also choose new lawmakers when they go to the polls on October 27, but it is the push to enshrine major pension changes in the constitution that has captured the attention of ordinary citizens and international markets. If approved by a majority, the measure would increase minimum benefits, lower the retirement age and transfer privately managed savings to a government-managed trust.
Supporters see the plan as a way to distribute Uruguay’s resources more equally and equitably. Opponents, including current President Luis Lacalle Pou and the two main candidates to succeed him, warn of the fiscal consequences. Market jitters over the election led to a sell-off in some of the South American country’s international bonds last month, while the Uruguayan peso posted its worst performance in a year, falling 3% against the US dollar.
The country with 3.4 million inhabitants is known as an island of peace in turbulent Latin America, partly thanks to its stable government. Google chose Uruguay this year to host a massive data center and foreign billionaires keep second homes in Montevideo and Punta del Este. But while the proposal will immediately benefit older people with low pensions, it strikes a chord with young voters in a country that generally scores better than its neighbors on income equality.
“How can it not be a just thing to increase even slightly the pensions of those who built the country with their labor?” said Mauricio Vario, 33, who works at his family’s fruit and produce stand in Montevideo. He supports the measure because he agrees that no pension should be lower than the minimum wage, currently 22,268 pesos ($537) per month.
The initiative, technically known as a plebiscite and backed by a powerful labor confederation and social organizations, aims to dismantle the system created in 1995 where pension savings managed by pension funds supplement social security benefits. It would increase an average monthly minimum pension of 18,840 pesos by almost 20%.
“It is dangerous and harmful. Taxes will have to be increased and important state benefits will also have to be reduced,” Lacalle Pou said in a televised address on October 1.
If approved, Uruguayan pension funds known as Afaps, which manage retirement savings on behalf of 1.6 million workers, would have two years to cease operations. Its elimination would likely have a chilling effect on local capital markets, where they are the main buyers of government and corporate bonds. The construction industry has warned that a positive vote could jeopardize infrastructure financing.
Republica Afap and the trade group representing the other three funds – Afap Itau, Afap Sura and Integracion Afap – declined to comment.
Most polls show that the measure falls short of the absolute majority of votes needed, although as many as 30% of voters remain undecided. Support for the referendum fell from 51% to 47% in a survey published on Tuesday by pollster Factum.
But union leader Karina Sosa sees it as an act of social justice and self-defense against future attempts to raise the retirement age. The unions plan to distribute 3.5 million ballots and mobilize as many as 3,500 volunteers to distribute them at polling stations on Election Day, she said.
“The plebiscite is the people’s outraged response to a system that only works for the most powerful,” Sosa said. “What do we want to achieve? A more egalitarian society in which social security is a mechanism for the redistribution of wealth.”
Supporters of the proposal are taking advantage of their dissatisfaction with Lacalle Pou’s pension reform, which gradually raises the retirement age from 60 to 65 and gives a greater role to private savings.
The leading presidential candidate, Yamandu Orsi of the left-wing Broad Front, opposes the pension measure, although his party has refrained from taking a formal position. His main rival, Alvaro Delgado of the incumbent center-right coalition, has warned of an “economic collapse” if it is approved.
Voting in general elections is compulsory, but the plebiscite is voluntary. Uruguayans will vote for lists of presidential and congressional candidates, while supporters of the plebiscite will have to cast a separate ‘yes’ ballot. The ruling coalition parties and most of the Broad Front do not include the ballot paper with the lists they distribute ahead of the vote and that means many people will have to proactively obtain a ballot paper at their polling station, said Rafael Porzecanski, director of polling agency Opcion . Consultants.
“That reduces the chance that the referendum will be approved,” he said. The trade union confederation “can mobilize people, but not all the plebiscites it supported managed to go ahead.”
Nevertheless, Uruguay could join others in Latin America that have jettisoned or relaxed pension systems based on individual savings accounts. Argentina nationalized its pension companies in 2008, while Chile and Peru allowed savers to withdraw billions of dollars in retirement savings.
Claudia Calich, who manages about $5.5 billion as head of emerging markets at M&G Investments, thinks volatility in financial markets due to the retirement vote would be manageable. The company has an overweight in Uruguay’s international bonds in local currencies.
“If the plebiscite is approved, it would be a financial setback for the country. But it will likely take a number of other policy mistakes for the Uruguay story to unravel,” Calich said, referring to the country’s reputation as a stable borrower.
(Updates recent poll in 10th, election law, procedures in 15th paragraph)
Most read from Bloomberg Businessweek
©2024 BloombergLP
