ECONOMY NATIONAL

Fifth AFP withdrawal and pension reform on the horizon

By popular demand, the government plans to reform the country’s private pension system (AFP). Finance Minister Mario Marcel said a bill will be sent to Congress next year. A reform of the pension system was one of the main claims made by protesters during the 2019 social outburst.

Finance Minister Mario Marcel announced during a presentation before the Lower House on Tuesday, Mar. 22, that a new AFP pension plan is currently in the works. He also said that the government had a strong will to start a “social dialogue” around the reform in order to ensure its acceptability with the general public, but that at the same time the intent is that the consultation process not last longer than a couple months. He said that officials “are aware that there is a lot of anxiety to finally see a proposal on the table.”

A swift process to reform

According to Marcel, once the initial consultation period is over, May will be dedicated to the refinement of a proposal together with members of Congress. “We hope to arrive with a bill, one or more reform bills in June,” he said.

The reform would focus primarily on personal taxes, on the royalty for large-scale mining, and on green taxes. Marcel also said that one of the main goals was to substantially reduce tax evasion and avoidance, as well as insure better replacement rates, as Chile’s are some of the lowest among all OECD countries.

From Pinochet to Pandemic: a History of Chile’s AFPs

A fifth pension withdrawal?

Since the start of the pandemic, Congress has approved four partial AFP pension withdrawals, which have each allowed citizens to pull 10 percent of their savings from their pension funds. These funds were the main source of relief for households suffering financial difficulties during the Covid-19 pandemic. 

The fiscally conservative Piñera administration had always opposed these withdrawals, but the system currently in place lets Congress bypass certain laws that give the president sole prerogative over new spending proposals. A fifth withdrawal is currently being discussed and although the Boric administration also advises against it, the idea of legislating one had the quasi-full support of the ruling parties within the Lower House on Wednesday.

These AFP 10 percent withdrawals have been very popular among all income levels of Chilean society, with many high-income Chileans withdrawing the money to put it into voluntary savings accounts or investments and low-income Chileans preferring to receive cash in hand to repay debts and replace lost income.

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