Uruguayans have long been able to look across the Rio Plata to their larger and louder neighbours in Argentina and roll their eyes at the endless economic crises and political chaos. Not for much longer, perhaps. Uruguay heads to the polls today to elect its next president, but election fever has been roundly overshadowed by (if economists are to be believed) referendum also taking place today.
Analysts have described it as a possible ‘Brexit moment’
The national plebiscite has been proposed by trade unions and would radically overhaul the country’s entire pension system. The retirement age would fall by five years to 60, pension payouts would be pegged to the minimum wage, and the $23 billion private pension industry would be effectively nationalised – private savings would be transferred to a government trust. All the main election candidates oppose the change, but polls suggest that around half of Uruguayans are in favour.
Uruguay is South America’s smallest country and, in a region which has all-too-often been characterised by chaotic politics, stands out as a utopia of stability. Its citizens are, on some measures, the wealthiest on the continent. Its poverty rate is low and its politics rarely make the news. In recent years it has been most notable for having the “world’s humblest head of state in former president José Mujica, who donated 90 per cent of his salary and maintained a modest lifestyle living on his farm even while in office.
Crucially, it has one of the oldest populations in South America, making the stakes of changing the pension system enormous. There have been stark warnings that, if approved, the reforms could threaten stability. Alvaro Delgado, the conservative presidential candidate, warned that it would ‘blow up’ the country’s economic model. ‘It is clear that all our plans would have to be reconsidered,’ he said. His centre-left rival, Yamandu Orsi, who is leading in the polls, is also in opposition to the reforms. He has described the union’s proposal as ‘inconvenient’ and echoed his ally, former president Mujica, who said its approval would cause “chaos”.
While many would benefit from the lowering of the retirement age and a potential boost in payments, it would put tremendous strain on the government’s finances. The nationalisation of pension schemes could also lead to years of legal wrangling. Few countries link the level of pension payments to the minimum wage, not least because it makes increases in the latter less likely because of the higher cost it incurs.
Investors are concerned that Uruguay, long seen as a safe bet in a region where few safe bets exist, could be about to jeopardise its good reputation. A recent note from JP Morgan warned the reforms would ‘compromise medium-term fiscal sustainability” and widen the pension deficit. The announcement of the vote triggered a mini sell-off of government bonds and the worst slide in the value of the peso in more than a year. Uruguayan pension funds are also the main buyers of government debt, leaving question marks over how easily public finances could be boosted.
Analysts have described it as a possible ‘Brexit moment’ for the country, where the populace could go against the established experts warning of economic catastrophe.
However, there is a core of support for reform. Low-paid pensioners would benefit – some projections suggest the typical monthly payment would increase by 20 per cent. A lower retirement age would also benefit those set to retire in the coming years who would be able to do so five years earlier than planned, should they choose to. The unions argue that it is a way to redistribute the country’s resources more fairly. ‘The plebiscite is the people’s indignant response to a system that only works for the most powerful,’ union leader Karina Sosa said. ‘What do we want to achieve? A more egalitarian society where social security is a wealth redistribution mechanism.’
And it’s not just the older generations and unions who are in support. A 33-year-old fruit and veg seller in the capital Montevideo told Bloomberg: ‘How can it not be a just cause to increase just a little bit the pensions of those who built the country with their labour?’
But how fair is it? Just 2.2 per cent of those over the age of 65 were living in poverty in 2023. That compares to around a fifth of those under the age of 18. Progressives would argue, with some justification, that any redistribution of wealth would be better used targeting younger people.
Recent polls have shown that around half of Uruguayans support the reforms, while 40 per cent oppose them. The latter number is on the rise, but a majority will be enough for them to be approved. Investors and public finance experts around the world will be watching nervously – and hoping the public heed the warnings.
Comments