ECONOMY NATIONAL

What does the reform of the Chilean pension system mean?

President Gabriel Boric recently presented a new bill that seeks to replace the existing Chilean pension system. The bill qualifies the state to be co-administrator of workers’ savings, putting an end to the private pension funds. Although the proposal has been largely applauded by economists in the sector, it still needs to pass Congress.

On Nov. 2, President Boric announced a new plan for the Chilean pension system in a televised speech. The reform entails a radical change to the traditional system. Indeed, the state would be entitled to co-administer peoples’ private savings, while employers would be required to entrust an additional 6 percent of their salary to a publicly-run social security system, ultimately reflecting 16 percent in total wages.

The proposal aims to reform one of the structural problems with a significant impact on Chilean seniors’ quality of life: low pensions in relation to the standard of living they enjoyed in their younger years. According to the Finance Ministry’s statement, the reform will also increase the state-funded guaranteed universal pension from CLP$194,000 to $250,000 (i.e., from about US$213.50 to US$275).

“The current pension system is in crisis. Today’s pensions are not enough for our fathers, mothers, grandfathers, and grandmothers to have a decent life in their old age, regardless of how much they worked,” Boric stressed in his speech late last Wednesday. The urgency of a new plan is also aimed to overcome the Covid pandemic “relief measures” which undermined the system. 

In September 2021, Congress approved a bill that allows workers to tap into their private pension accounts. Although the solution was initially viewed as a one-time relief measure and helped tame economic recession, it stoked inflation, leaving almost a third of Chile’s 11 million pensioners with no retirement savings after a second payout.

Also read:

Five Pillars for a Pension Reform in Chile

An end to the AFPs

The current mandatory individual capitalization system requires workers to deposit a percentage of their taxable remuneration, salary, or income each month into a personal account, the “AFPs,” from which the system takes its name. These savings are intended to finance workers’ future retirement pension and, in the event of death, a survivor’s pension for beneficiaries. Three pillars form the Chilean pension system: Contributive, Solidarity, and Voluntary. It was created by Decree Law No. 3,500 of 1980. Chile was the first country in the world to fully privatize social security, and the model was reproduced in more than 30 other countries.

Although the AFP system enabled Chile to develop into one of Latin America’s wealthiest countries and accumulate more than US$150 billion in savings, it is roundly criticized these days. Dismissed as a remnant of the neoliberal economic policies of Augusto Pinochet’s dictatorship, the AFP system was envisioned in the 1980s by Pinochet’s Secretary of Labor and Pensions, Jose Piñera. He conceived AFPs operating in a competitive system among at least 20 different AFPs, ultimately paying out 70 percent of retirees’ former salaries. In reality, a lack of competition between AFPs caused fixed administrative costs and high commissions. Because of such imbalance, savings are unequally distributed, often leaving low-income workers with little money in their old age. Although former President Michelle Bachelet’s administration implemented many reforms to try to overcome Piñera’s system’s shortcomings, a more substantive change is needed to reach the 70 percent goal.

Boric’s state-run proposal

As one of the main pillars of Boric’s program, the new pension plan intends to hand off the management to a state-run company and introduce three different positions, as outlined by the Ministry of Finance. 

First, an autonomous pension administrator (APA) will collect the funds, manage the accounts, and pay the benefits; second, a public and autonomous pension investor (IPPA) will exclusively manage Social Security; third, private investors, the IPPs, will handle the administration of the worker’s 10.5 percent contribution.

Many economists, such as Guillermo Larraín, former Superintendent of Pensions, support Boric’s proposal. Larraín comments in an interview with El País, “The project structurally points to the same thing that has already been raised by the center-left governments from 2014 onwards, although a little stronger in language.”

The reform will be taken to Chile’s lower house of Congress next week, and it is expected to meet opposition as Boric does not have a majority in any of the chambers.

Read more:

The Other Pension System: Chilean Security Forces Retire Comfortably

 

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