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Uruguay faces a test of the stability that has made it one of Latin America’s wealthiest countries as voters decide on whether to cut the retirement age and adopt other uncosted pension reforms that would sharply expand the fiscal deficit.
If voters approve a constitutional amendment in a referendum on Sunday, the country will reverse a 2023 reform that raised the pension age from 60 to 65 in the nation of 3.4mn.
It will also tie minimum pensions to the minimum wage, and transfer billions of dollars from private pension funds to a state-run system.
Proposed by labour unions and opposed by most political parties, the reform has unnerved economists. If passed, it would also put Uruguay at odds with a global trend of rising retirement ages as countries grapple to meet the costs of ageing populations and increased life expectancy.
The government has said that raising the minimum pension would open a $1.1bn hole in the budget next year, equivalent to 1.5 per cent of gross domestic product. Lowering the retirement age would cost $3bn, about 4 per cent of GDP.
Economists warn that the expanded deficit would increase Uruguay’s borrowing costs at a time when growth has been stagnating for a decade.
“Voters are going to be offered a very alluring proposal [which] would be tremendously risky for Uruguay,” said Ignacio Munyo, director of Montevideo-based think-tank Ceres. “This is a litmus test to see if we really are immune to the global populist trends we’ve so far avoided.”
Supporters say the reform is needed to better redistribute wealth and improve minimum pensions, which stand at $450 a month in one of South America’s most expensive countries.
“Some jobs here leave you with a miserable sum,” said Marcel, 30, a taxi driver who backs the referendum. “I don’t like that the [current] government made us have to work until later. This would make it voluntary.”
The plebiscite is happening alongside the first round of the presidential election, in which centre-left Yamandú Orsi of the Frente Amplio coalition leads narrowly over Álvaro Delgado of the centre-right governing coalition.
Neither candidate favours the reform. Delgado has likened the referendum to “playing Russian roulette with [Uruguay’s] future.” Orsi has said the reform would be “highly inconvenient” and make it harder to tackle other issues, such as Uruguay’s 25 per cent child poverty rate.
Marcelo Abdala, head of the labour federation that triggered the referendum via a petition, told local media last month that politicians’ concerns were overblown. “Every time the people appeal to democratic mechanisms to enshrine a right, [they say] it will bring chaos.”
The reform’s prospects have dimmed since a high-water mark of support of almost 60 per cent in May, according to polling firm Cifra. Its latest survey found that 42 per cent of voters supported it, 35 per cent rejected it, and 25 per cent were undecided. Historically, support for referendums in Uruguay has dipped on election day, according to pollsters.
Still, the poll’s approach has spooked markets. The interest premium over US treasuries that investors need to hold Uruguayan sovereign debt has climbed by about 40 per cent from historic monthly lows in April, though, at 89 basis points, it is still the lowest in the region.
Businesses warn that the reform would force Uruguay to raise what are already some of the region’s highest taxes and increase its large public debt, deterring investment. It would also cast doubt on funding for big infrastructure projects in which the private pension funds, which manage $23bn, are major investors.
Mariné, a 45-year-old jewellery seller, said she would not back the reform because “we needed to raise the retirement age to be sustainable” as the population aged. The average age is 38.
“I think the law needs to be improved to help those of us that need help, but they should do that in congress, not like this,” she added.
Most efforts to reverse retirement age increases — such as in France, Russia and Brazil — have met with limited success. But in 2017 Poland lowered its retirement age from 67 back to 65 for men and 60 for women, a move which the government estimated cost 0.5 per cent of GDP the following year.
The OECD estimates that more than half of its 38 member countries will increase their retirement ages by 2060, bringing the average age to 66, up from around 64.
Additional reporting by Mary McDougall in London
