History of Chile

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

The privately managed pension accounts (AFPs) are legacies of the Pinochet dictatorship. The debate over a 10% withdrawal from the funds has the defenders of the system worried that this could lead to incisive changes. And this resistance suggests the AFPs have throughout their history been more important for Chile’s social system than apparent at first sight.

In the wake of lower-house approval of a bill to allow citizens to withdraw 10 percent from their privately managed pension accounts (AFPs), a tense has gripped Chile.

Although not yet law, the lower-house approval still represents a massive defeat for the ruling Chile Vamos coalition and President Sebastián Piñera. The matter is also personal for the president as his older brother, José, was the architect of  the AFP system.

Created during the dictatorship in the early 1980s, the AFPs became a pillar of the neoliberal society the dictatorship engineered. And although centrist and left-wing presidents have made changes to the system, they have maintained the fundamentals.

AFPs – A Neoliberal Solution

During the 1960s, Chile had over 30 private pension funds over 2,000 laws and decrees to regulate them. In 1968, Congress added over 1,000 laws to secure proper funding. Then-president Eduardo Frei Montalva attempted to fix the issue with massive reforms, but most of them faltered in Congress.

After Augusto Pinochet took power in a military coup on Sept. 11, 1973, he began rebuilding the economy with the help of the Chicago Boys, a group of economists who studied at the University of Chicago. Together they conducted a neoliberal overhaul of the country.

Among those Chicago Boys was José Piñera, who was named Minister of Labor in 1978 and spearheaded a major reform to the pension system in Chile. After various meetings with military leaders, he convinced them of his plans and, in November 1980, law decrees 3500 and 3501 were created, officially establishing the AFP system.

Those who had money in the old system were given a choice, they could either remain with the older system or join the new system and receive a 10% bonus to their contributions when they retired. Those who chose to remain with the old system were absorbed by the Social Welfare Institute (IPS), the sole purpose of which is to oversee the pension funds of citizens not in the AFP.

In addition, everyone who started their employment after November 1980 were automatically added to the new AFP system.  The only ones not affected by this were armed forces and Chile’s national police force (the Carabineros), they each had their own provisional funds.

The new system aimed to ease the burden on the public sector by completely privatizing the pension system and by using citizen’s savings to generate more profits for the economy. The government would only work as an overseer of these funds, which it did by creating the Superintendence of Pension Fund Administrators in 1980.

Opposition Seeks to Nationalize Chilean Pension System

Fixing the Leaks

The new system was seen as a success and various other countries decided to copy this new system, but, as time went on, “cracks and leaks” began to show up. Some countries decided that it was better to modify the privately-managed pension accounts by including a state option, while others decided to get rid of it altogether.

In Chile, however, the AFP system didn’t receive any substantial reform until 2002, when President Ricardo Lagos signed a law that created five different types of pension funds based on levels of risks and rewards. These were labeled by letters and went from A (high risk and high reward), to E (low risk and low reward).

The biggest reform to date took place in 2008, when President Michelle Bachelet reformed the system to benefit independent workers while still leaving it as a voluntary option. The reform also had the goal of lowering the resources that were going to the IPS, since many of those who had been covered by it had passed away.

“No + AFP”

As more people have retired under the AFP system, its shortfalls have become more clear. At the moment, the pensions’ payout is on average just US$283 per month, which is far below the poverty line (currently US$633) and a huge disappointment from the AFP’s original promise that pensioners would receive the equivalent of their paycheck in 2020.

In 2016, history teacher Luis Mesina founded the movement “No + AFP” and organized numerous protests against the pension system. The group’s main argument stems from the increasingly poor returns that retirees receive, with some only receiving about a third of what they had saved. After numerous protests, the group managed to meet with then-President Bachelet, however the meeting went nowhere.

The No + AFP movement sprang back to life during the social protests in October 2019 and again during the Covid-19 pandemic – this last time when Congress had under review the bill to allow Chileans to withdraw 10% out of their pensions funds because of the Covid-19 economic crisis.

Opposition Seeks to Nationalize Chilean Pension System

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