economic Commission Evaluates Impact of Potential AFP Withdrawal

In response to numerous bills presented to Congress in recent months seeking authorization for an eighth withdrawal of AFP funds, the Economy Commission established a working group to assess the potential ramifications of such a measure. The session, held on March 17, 2025, included representatives from the Central Reserve Bank of Peru (BCRP), the Ministry of economy and Finance (MEF), and the Superintendence of Banking, Insurance and AFP (SBS), along with other financial experts.

Central Bank Warns of Negative consequences

Carlos Montoro, monetary policy manager of the BCRP, argued that another AFP withdrawal would primarily jeopardize individuals’ retirement savings, increasing the risk of poverty in old age. He also noted that it would diminish the accumulated savings for those who choose to keep their funds in AFPs.

It affects the profitability of the funds, as having the AFP liquidating in a short time active and are large amounts, having a very large offer, the value is lost, lowers the price.

Carlos Montoro,BCRP

This situation is akin to a fire sale,where assets are sold at a loss due to the urgent need for cash. This mirrors concerns in the U.S., where early withdrawals from 401(k)s and IRAs can led to notable penalties and reduced retirement income. Such as, withdrawing funds before age 59 1/2 typically incurs a 10% penalty, along with regular income tax. The BCRP’s warning highlights the importance of preserving retirement savings for long-term financial stability, a lesson equally applicable to the U.S. retirement system.

Ministry of Economy Estimates Significant Outflow

Andrés Zacarias, general director of the General Directorate of Private Financial and Pension Markets of the MEF, stated that an eighth withdrawal of AFP funds, without targeted criteria, would drain between S/ 26,000 to S/ 28,000 million (approximately $6.8 billion to $7.3 billion USD) from the pension system. This represents about 25% of the current funds held in AFPs. This massive outflow could destabilize the Peruvian financial markets and further erode confidence in the pension system. A similar scenario in the U.S. would be akin to a significant percentage of Americans simultaneously cashing out their retirement accounts, perhaps triggering a market downturn and jeopardizing the financial security of millions.

Millions at Risk of Depleting Retirement Savings

According to the SBS,previous AFP withdrawals have already left over five million Peruvians with zero funds in their pension accounts. This alarming statistic underscores the severity of the situation and the potential for a future crisis in retirement security.In the U.S., the Employee Benefit research Institute (EBRI) consistently reports on the challenges Americans face in accumulating sufficient retirement savings, with many households projected to fall short of their retirement income needs. The Peruvian experience serves as a cautionary tale for the U.S.,highlighting the importance of policies that encourage and protect retirement savings.

Superintendence Official suggests Limited Exceptions

During the Economy Commission session, a representative from the SBS suggested that any further withdrawals should be limited to specific cases of proven need, such as unemployment or severe illness. This approach aims to balance the immediate financial needs of struggling families with the long-term health of the pension system. This concept aligns with discussions in the U.S.about potential reforms to Social Security and other retirement programs,where policymakers are exploring options for providing targeted assistance to vulnerable populations without jeopardizing the overall system.

Congressman Acknowledges Concerns, Evaluation Continues

Congressman Carlos Alva, president of the Economy Commission, acknowledged the concerns raised by the BCRP, MEF, and SBS. He stated that the commission would continue to evaluate the potential impact of another AFP withdrawal, taking into account the various perspectives presented. The debate in Peru highlights the complex trade-offs involved in managing pension systems, particularly in times of economic hardship. U.S. policymakers face similar challenges as they grapple with issues such as Social Security reform, retirement savings incentives, and the adequacy of retirement income for future generations.

Potential Counterarguments and Criticisms

While concerns about the long-term impact of AFP withdrawals are valid, proponents argue that these withdrawals provide crucial financial relief to families struggling with economic hardship. They contend that individuals should have the right to access their own retirement savings, especially during times of crisis. Furthermore, some argue that the AFP system has not delivered adequate returns for many Peruvians, making withdrawals a more attractive option. In the U.S.,similar arguments are often made in favor of allowing greater adaptability in accessing retirement funds,particularly for those facing financial emergencies. Though, critics warn that such flexibility could undermine the long-term security of the retirement system and lead to widespread poverty in old age.

Practical applications and Lessons for the U.S.

The Peruvian pension crisis offers several valuable lessons for the U.S. retirement system:

Peruvian Pension Crisis: Can Repeated AFP Withdrawals Bankrupt retirement Dreams? an Expert Weighs In

To gain further insight into the Peruvian pension crisis and its potential implications, we spoke with Marco Hernández, a leading expert in retirement systems and financial planning.

The parallels are striking. Both systems face the tension between providing immediate support and ensuring long-term solvency. The U.S. can learn some critical lessons.

Marco Hernández, Retirement systems Expert

Hernández emphasized the importance of mandatory savings programs to guarantee a baseline level of retirement security, the need for a more thoughtful approach to early withdrawals from retirement accounts, the importance of providing financial literacy so people understand the consequences of their financial decisions, and examining how to design pension systems that are both enduring and equitable, including potentially auto-enrollment and incentives for lower-income individuals.

When asked about alternative solutions to address the immediate financial needs of struggling families while safeguarding the long-term health of the Peruvian pension system, Hernández suggested a multi-pronged approach:

• Targeted Relief Programs: Designing specific relief programs that are carefully targeted at the most vulnerable, such as providing subsidies for essential goods or offering support services, without undermining the pension systems.
• Economic Reforms: Reforms aimed at fostering sustainable economic growth, creating jobs, and raising income levels.A rising tide lifts all boats, Hernández noted.
• Strengthening Financial Literacy: Implementing thorough financial literacy programs to empower individuals to make informed decisions about their financial futures.
• Re-evaluating AFP Regulations: Regulations need to be revisited to ensure their financial health.

Hernández offered key advice to both the Peruvian government and individuals with AFP accounts:

To the Peruvian government, I would strongly emphasize the need for a comprehensive, long-term strategy that balances immediate needs with the requirements of a sustainable pension system. This plan must focus on economic growth, targeted relief, and strengthening the pension system’s financial foundations. To individuals with AFP accounts,I would recommend seeking professional financial advice and resisting the temptation to make hasty decisions about withdrawing funds. Understand the long-term consequences of each choice, and prioritize preserving your nest egg whenever possible.

Marco Hernández, Retirement Systems Expert

Hernández’s insights underscore the importance of proactive planning and responsible financial decision-making, both for individuals and policymakers.The situation in Peru serves as a stark reminder of the fragility of pension systems and the need for sustainable solutions.

Here’s a video discussing similar challenges in the U.S. retirement system:

The debate continues in Peru, and the outcome will have significant implications for the financial security of millions of Peruvians. As the U.S. faces its own retirement challenges, it is crucial to learn from the experiences of other countries and to prioritize policies that promote responsible financial planning, informed decision-making, and sustainable solutions for protecting the well-being of future generations.