The Pension System in Chile: “A Reform is Not Enough”

On Wednesday, July 15, Chile’s lower house of Congress votes again on a bill that would allow Chileans to withdraw 10 percent of their pension funds. In the first vote, the Chilean government suffered a defeat that resulted in a political crisis and a debate about the entire Chilean pension system. According to Francisco Díaz, Undersecretary of Labor during the second Bachelet administration, the system will fall at some point, whether the bill is approved or not: “The whole idea that pensions funds compete on commercial markets with the money of workers should stop.”

Chile’s lower house of Congress approved a bill last week that would allow Chileans to withdraw 10 percent of their pension (AFP) funds during the economic crisis. The defeat suffered by the government caused divisions in the Chile Vamos coalition to deepen even more; and, after several urgent meetings between ministers, party presidents and President Sebastián Piñera, the government announced it would present additional financial support packages to secure enough votes for a rejection of the bill.

Tomorrow, July 15, the lower house votes again on the bill, this time on every article in the bill, as is mandatory with constitutional reforms. Each article will need at least 60 percent of the votes for approval. In the days leading up to the vote, the debate around the bill has grown to a debate about democracy, equality, and economic growth. There is a lot at stake for the government, says Francisco Díaz. Díaz was Undersecretary of Labor during the second Bachelet administration, and he led a reform of the now-debated pension system.

Díaz tells Chile Today that the debate about the withdrawal of funds has grown to other proportions. “The debate has turned anti-capitalist, anti-elite. People are not trusting the system anymore. They think the AFPs are only stealing from them.” After some hesitation, the labor rights lawyer says he would vote in favor of the bill as well. “The negligence from the Chilean government during this pandemic leaves no other option. The measures taken for the middle class, for the vulnerable families, are simply insufficient. Imagine, the package that announced today will be their fifth aid package. Every time they are increasing the benefits little by little, which causes insecurity among citizens.”

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Lower House Approves Withdrawal of Pension Funds in Historic Vote

“If the Bill Passes, It Would Mean a Gigantic Political Defeat”

However, Díaz says it is most likely that the bill will be rejected in the lower house tomorrow. “Last week, the bill got approved with 95 votes, so now the government only needs to turn around the votes of three deputies to reject.” A lot depends on the measures that the government announced today, Díaz says, adding that even if the bill is rejected, the government loses. “Whatever the outcome will be, the government is at a dead end, all options are bad. If the bill passes it would be a gigantic political defeat. A defeat that would mean the fall of any government in any other country. If the bill gets rejected, they are getting the Chilean population against them. Because in that case, the message that the Executive gives, is that he protects the AFPs before Chileans.”

With an open letter from executives of Chilean enterprises in El Mercurio, emails from pension fund managers to their clients, and warnings from several ministers, the debate turned heated in the last few days. Interior Minister Gonzalo Blumel even said that if the bill is approved the government could face problems financing announced emergency aid. Díaz sees similarities between the situation now and when he worked in the Chilean government. “The comments from Blumel are part of a campaign of terror. Something that is often used by the Chilean right. They did the same during the Bachelet administration when she presented her reform. Today, National Renewal’s president Mario Desbordes even admitted they should not have voted against that reform.”

The arguments published in the open letter in El Mercurio against the bill went from “fear for democratic instability” to “economic collapse.” With the withdrawal of 10 percent of pension funds by the Chilean population, some US$15 billion would be withdrawn from investments in the economy, they argued. “The economy is not going to collapse. [US$]15 billion dollars, or maybe even less, that could get withdrawn, would normally get invested abroad. So, it has no impact on Chile,” Díaz counters. “The pension system is also not going to collapse. The pensions are bad enough, if people would withdraw their 10 percent it would only mean that in 30 years, they would receive 20 dollars less. That’s not a collapse.”

Read more:

Piñera Announces Extra Middle Class Support Ahead of Pension Withdrawal Vote

“The AFPs Rejected Our Reform, Now They Regret It”

Soon after the first vote in the lower house last week it was clear that voting on the pension system was a clash of ideologies. The government coalition pulled out all the stops to defend the system, a move that Díaz tries to explain. “It is a mixture of personal interests and political interests. Ministers and politicians in the Chilean government often continue on as executives at the AFPs or at major enterprises who receive investments from AFPs. But it is also a political problem; The AFPs are Chile’s greatest economic power, although they are not controlled by the State or by citizens themselves,  they are only managed by a few holdings.”

The resistance against the bill, the arguments used, they all call to mind the time Díaz served in the Bachelet administration and was one of the driving forces behind a reform of the system. During her term, a State pension was created, Díaz explains. “We planted the idea of the solidarity pillar, a mixed system of private and state administered pensions where a 5% extra, charged from employers, would go to a state fund; 3% would go to the individual accounts of workers; and 2% to a new system of collective savings. The opposition we received was both irrational and absurd, it was only focused on personal interest. The AFPs rejected it, and now they regret it.

The pension system was one of the reasons Chileans took to the streets during the social protests of 2019, but the movement “No+AFP” against the current pension system was marching for years before the social uprising. The system functions on contributions, with Chileans obliged to pay 10 percent of their income to a fund which is managed by a pension manager. These pension managers use the resources to invest in stock, often outside the country, and much of the criticism of the system revolves around the high risk to participants due to bad AFP investment decisions over which they have practically no control.

The pension system, designed during the dictatorship by Chicago Boy (and brother of the current president) José Piñera, will always be a topic of controversy in the country. Díaz says Chile needs a new system. “I don’t think a reform would be enough. The only element worth saving is the fact that in a future system additional saved money could be invested to generate a bigger pension. But the whole idea that pensions funds compete on commercial markets with the money of workers should stop. The lack of solidarity in this pension system is something that will continue to be a problem. The fact that it is based exclusively on individual accounts instead won’t work any longer. I don’t know how it will end, but it will end.”

Díaz is a lawyer and expert in the area of labor rights. He was Undersecretary of Labor during Bachelet’s second term. He holds a Master’s degree in Political Science from the London School of Economics and was a Fulbright scholar at the University of Pittsburgh.


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