Why Chile’s pension overhaul is more than a reform

Chileans have become cynical about their leaders, and the leaders have become cynical about citizens. The pension reform introduced by the government is one factor that could alleviate cynicism, even though public opinion has shifted. Yet, if the political class fails to move it forward, resentment will only grow.

In the last two months, our politics and politicians have reminded us of the reasons the public got fed up with them in 2019: flip-flopping, inability to find common ground, and much talk but little action.

The last show of contempt came from the populist People’s Party (PDG) that reneged on a March agreement to support the government’s pick, communist Karol Cariola, as Lower House head. Citizens were afforded the role of mere spectators. And this can be extrapolated to the constitutional process, which remains stuck, even though talks have been ongoing since early September, when the original constitutional proposal was crushed in a plebiscite.

Pension Reform

In this adverse context, the government presented its pension reform proposal, a true déjà vu. The previous Bachelet and Piñera administrations tried something similar but failed due to the lack of respect and empathy our politicians have for the public, especially for the thousands who receive misery pensions. That’s over a decade of sterile discussion in Congress without producing results – a shame and a provocation.

Hence, President Gabriel Boric’s audacious move is an opportunity for those Chileans who have been crying out for a solution but were ignored by “our politicians.” And it is an opportunity for the government.

Let’s start by stating that the reform is quite faithful to Boric’s government program.  However, he picked up several aspects from his predecessors. Among them are a mixed system – incorporating the state as an actor and a six-percentage point increase in contributions to 16 percent, to be paid by employers. And 70 percent of the increase would go to an individual fund while 30 percent would go to a collective one. However, for low incomes, 100 percent would go to the individual fund and for incomes above US$1,500, the increase would go completely to a collective fund.

Also read:

What does the reform of the Chilean pension system mean?

This distribution is not surprising, but the audacity to go against the current is, since surveys found citizens would be reluctant to share additional income. In 2019, public opinion was much more favorable toward a solidarity system to improve misery pensions.

And although the end of the private pension fund managers (AFP) was announced, the question remains as to whether the reform is a change of name rather than substance.

A key point of debate, pushed by the opposition, will revolve around the universal guaranteed pension and the change to the system. Another point will be if the six percent must be fully paid by the employer or could include a state subsidy or employee participation. Of course, the government is at a disadvantage in the negotiations and a solidarity solution isn’t popular anymore.

According to the reform, freelancers would contribute voluntarily, which would eliminate the tax benefit for voluntary savings and incorporates the option of self-loan for up to US$1,000.

Telling a Story

But beyond the importance of the issue for the public – even though some tried to convince us otherwise – is that this reform is crucial for the government, which was left without a story after the constitutional plebiscite, also dealing a blow to its program.

Boric has the opportunity to recover the agenda and connect with the public on a sensitive issue, in addition to promoting a debate in which the right will be forced to align with the AFPs and certain business sectors.

Apart from the opportunity, the reform is also a litmus test for Chilean politics. If it fails, it will not only be an embarrassment for political parties, but also feed resentment that previously culminated in the social outbreak of 2019.

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