Analysis-Aging Uruguay's vote to drop pension age is rattling investors

By Lucinda Elliott

Uruguay heads to the polls to vote for a new president this month, but investors have a wary eye on another ballot: a referendum to lower the retirement age in the fast-aging nation that some fear may cripple the country's finances.

The small but relatively affluent South American country of 3.4 million people has long been seen as a bastion of free markets and private enterprise in the region, which has attracted tech and finance firms, and fast development along its Riviera coastline.

But if approved, the reform would uproot a private pension system in place since 1996 and drop the retirement age by five years to 60, landing the government and the taxpayer with a large bill.

The move echos popular anger with smaller pension pots elsewhere but would mark a rare instance of a country lowering its retirement age, with nations including France, Britain, Japan and China all recently going in the other direction.

The reform has been promoted by left-wing unions, who argue that it would preserve workers' dignity in retirement by allowing them more money for a longer period. Despite the opposition of most political parties, the unions secured enough support on a petition in April to force the plebiscite, which is binding.

Opinion polls show around half of Uruguayans in favor of the reform, and about 40% against, although that number has been rising. The Oct. 27 vote needs a simple majority to pass.

The reform would "make any current economic or social security policy unviable," said Uruguayan economist Maria Dolores Benavente, adding it would mean the country going back to the "unsustainable system" that had been changed in the 1990s.

The rising possibility of a pension reform has led the Uruguayan peso to weaken over 10% against the dollar since April.

"If approved, (it) would compromise medium-term fiscal sustainability," JP Morgan wrote in a recent note, adding that the retirement age drop would widen a pension deficit, while raising lower-end pensions would cost an extra $1 billion per year.

URUGUAY'S 'BREXIT MOMENT'?

The reform proposes scrapping private pension schemes and shifting to a public model, which analysts say would put a bigger debt burden on the state, create legal complexities around transferring pension funds, and put Uruguay's investment-grade credit rating at risk.

Uruguay has one of the region's oldest populations, with a median age around 36 years old, compared to 32 around South America. That creates a potential time-bomb for the economy down the road as a large wave of people retire.

Conservative President Luis Lacalle Pou has called the reform "dangerous and harmful", and says it would put public finances on an unsustainable path, "crushing" confidence. His coalition faces a battle to stay in power against a center-left coalition.

Many voters in capital Montevideo, however, said the 'yes' campaign was winning them over, with the hope it would bring them more money.

"We have meager pensions in Uruguay. Retirees in this country are poor," said 68-year-old educator Jose Luis Correa, adding that he had to keep working out of necessity to cover his costs.

"That's why I support the end to private pension funds," he added. "If they can cut out private pension fund managers, there'll be more for us and future retirees."

Another Montevideo resident in his mid-50s, who asked not to be named but said he was planning to vote against the reform, said he was worried about his private savings and thought the "no" camp was not doing enough to convince people.

Nicolas Saldias, Uruguayan analyst at the Economist Intelligence Unit, said the political classes were largely optimistic the referendum would fail, but may be misreading the mood among voters and could get a shock.

"This could be Uruguay's Brexit moment," said Saldias, referring to the 2016 referendum in the United Kingdom to pull out of the European Union, when the government underestimated the level of public support for leaving.

"The population may vote in favor of it, despite what the establishment is saying."