Withdrawing the Pensions: Who’s Gonna Pay the 10%?

In times of pandemic, political populism has taken the media agenda. The latest crusade is the withdrawal of 10% from private pension funds (AFPs), but we also have had food boxes, special (maipucina) choreography created in Santiago’s Maipú district, and a host of unfortunate phrases from the president such as safe return and new normality. However, regarding the withdrawal of funds from the AFPs, it is good to reflect coldly on a project that will influence our present and future.

It is a fact that the current pension system is failing the objective it was created for. Today close to 1.2 million people receive pensions thanks to the state’s solidarity pillar, meaning the AFPs could not cover a minimally decent pension for that large percentage of the population. In this sense, it is not surprising that many prefer to withdraw 10% of their funds, and when they retire take advantage of the state benefit.

Today’s Chile suffers from an evident disaffection with respect to this issue: it is difficult to understand that, despite the fact that the money in the AFP is ours, we cannot touch it until our old age, adding to the fact that many citizens have shown retirement is not on their horizon and, finally, almost nobody believes they are going to get a decent pension. Obviously that begs the question: Why saving?

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This being the case, it would seem logical to withdraw 10%, but the situation is not so simple. Let us start from the fact that the state is not in a position to cover solidarity pensions for the entire population, and that was never the principle that inspired this legal reform. Therefore, if the agreement is to withdraw those funds, a formula must be established for their reimbursement, which will require shared commitments between contributors and state. It can’t be the affiliate who bears the entire cost due to a completely unprecedented situation, but neither are the fiscal coffers filled enough to reimburse the funds.

Given this and in the face of the upcoming scenario, it is time to be honest about how to recover that 10%: one option is to increase the retirement age by at least two years, another to design a state/employer solidarity fund or a kind of new recognition bonus. We must assume that a distribution system is not applicable to the Chilean situation because the demographic reality of our country does not allow it; nor is the state in a position to be in charge of covering the pensions of workers, we are not a rich country to be able to assume that social responsibility. Under this scenario, what corresponds is to start working in a mixed system where the AFPs have a role, the employers another and the state as well. And we already have a mixed system – the solidarity pillar partially fulfills this function.

The challenge then is to perfect the current system as it is simply not meeting its objective. Within this profound reform, it is imperative to end the retirement plan of the armed and security forces. It cannot be that this cost is practically equal to the solidarity pillar, with around 170,000 uniformed personnel compared to 1.2 million workers.

If we want to advance better pensions, we must standardize the existing retirement systems. But the AFPs are also going to have to make an effort, either by reducing their commissions, guaranteeing better returns and transferring greater benefits to the affiliates. In turn, companies will have to commit to this new challenge, contributing resources to the savings of their workers, and we workers must prepare ourselves to retire later.

Covering more than 20 years of decent pensions is a titanic task that requires a joint, responsible and solidarity effort. And of course, unlike in the Bible’s Exodus, here the “manna” will not fall from heaven.

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