The Chile pension system (
Spanish
Spanish might refer to:
* Items from or related to Spain:
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* Spanish, Ontario, Can ...
: ''Sistema Previsional'') refers to old-age, disability and survivor
pensions for workers in
Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
. The pension system was changed by
José Piñera
José Piñera Echenique (born October 6, 1948) is a Chilean economist, one of the famous Chicago Boys, who served as minister of Labor and Social Security, and of Mining, in the military dictatorship of Augusto Pinochet. He is the architect of Ch ...
, during
Augusto Pinochet
Augusto José Ramón Pinochet Ugarte (, , , ; 25 November 1915 – 10 December 2006) was a Chilean general who ruled Chile from 1973 to 1990, first as the leader of the Military Junta of Chile from 1973 to 1981, being declared President of ...
's
dictatorship
A dictatorship is a form of government which is characterized by a leader, or a group of leaders, which holds governmental powers with few to no limitations on them. The leader of a dictatorship is called a dictator. Politics in a dictatorship a ...
, on November 4, 1980 from a
PAYGO-system to a fully funded capitalization system run by
private sector
The private sector is the part of the economy, sometimes referred to as the citizen sector, which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government.
Employment
The ...
pension funds. Many critics and supporters see the reform as an important experiment under real conditions, that may give conclusions about the impact of the full conversion of a PAYGO-system to a capital funded system. The development was therefore internationally observed with great interest. Under
Michelle Bachelet
Verónica Michelle Bachelet Jeria (; born 29 September 1951) is a Chilean politician who served as United Nations High Commissioner for Human Rights from 2018 to 2022. She previously served as President of Chile from 2006 to 2010 and 2014 to 201 ...
's government the Chile Pension system was reformed again.
Pension system of 1926
![Arturo Alessandri-1920](https://upload.wikimedia.org/wikipedia/commons/7/74/Arturo_Alessandri-1920.jpg)
A social security system was introduced in Chile in the 1920s, which included a PAYGO pension system. By 1973 the funding of the pension fund was low, though 73% of all Chilean workers paid into the system. The reason for this was that almost all workers contributed only the statutory minimum contribution, and many successfully evaded pension contributions. The poor payment record is attributed primarily to the fact that individual contributions had little correlation with anticipated pension benefits.
Pension reform of 1980-81
![Pinochet 11-09-1982](https://upload.wikimedia.org/wikipedia/commons/5/51/Pinochet_11-09-1982.JPG)
On November 4, 1980, under the leadership of
José Piñera
José Piñera Echenique (born October 6, 1948) is a Chilean economist, one of the famous Chicago Boys, who served as minister of Labor and Social Security, and of Mining, in the military dictatorship of Augusto Pinochet. He is the architect of Ch ...
, Secretary of Labor and Pensions under dictator
Augusto Pinochet
Augusto José Ramón Pinochet Ugarte (, , , ; 25 November 1915 – 10 December 2006) was a Chilean general who ruled Chile from 1973 to 1990, first as the leader of the Military Junta of Chile from 1973 to 1981, being declared President of ...
with the collaboration of his team of
Chicago Boys, the PAYGO pension system was changed to a capital funded system run by investment funds.
[Joaquin Vial Ruiz-Tagle, Francisca Castro, The Chilean Pension System, ]OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
Ageing Working Papers, 1998, page 6 José Piñera had the idea of privatizing the pension system for the first time when reading the book
Capitalism and Freedom
''Capitalism and Freedom'' is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It has sold more than half a million copies since 1962 and ...
from
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...
Several (private)
pension funds, the so-called ''Administradoras de Fondos de Pensiones'' (AFPs), have been implemented.
For all citizens who are legally defined as workers, employers must pay a portion of earnings to a pension fund. Workers who had already paid in the old system got an option to continue to pay into the old system. But the statutory minimum contribution to the new private pension funds was set 11% lower than the contributions to the old pension system; therefore most workers changed to the new pension system.
The members of the Chilean military who implemented the new AFP system excluded themselves from it, keeping their pensions from the
Caja de Previsión de la Defensa Nacional.
The pensions of the military are substantially higher than those of the rest of Chileans, being most often similar to the income they have during active service.
[ However, differently from what a regular, society-wide, PAYGO system would operate, military pensions go to a small section of the population and are financed by all of the taxpayers in the country.
]
Overview
The Chilean workers yearly contributions in the private pension fund are amounting to about 3.5% of gross domestic product. The pension payments from the pension funds are still relatively low, mainly because yet just a few depositors have reached the retirement age. Until 2008 the private pension funds have accumulated capital of an amount of 52.77% of gross domestic product.
Government's responsibility
The establishment and the operation of the private pension funds are regulated by law. For example any pension fund must deposit minimum reserves. The types of investments that are permitted are defined by law. The compliance of the private pension funds is supervised by a government regulator, the ''Superintendencia de AFP'', now called ''Superintendencia de Pensiones''.
There are government guarantees for the following cases:
# All citizens who have contributed to a fund for at least 20 years are guaranteed a minimum pension. The difference between the minimum pension and the pension entitlement from the investment fund is paid by government.
# If a pension fund is unable to perform a defined minimum profit, it will be liquidated and the collected assets will be transferred to another fund. In this case, the government solves the assets gap.
# In case of bankruptcy of a pension fund the government pays out the pensions on public expenses.
The government pays a fixed amount as social assistance
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...
for those citizens who are not even entitled to minimum pension, the ''Pensiones Asistenciales'' (PASIS). But the provided amount of money is usually not nearly big enough to cover all people in need.
Due to the conversion from the PAYGO to the funded system, conversion costs will arise until the year 2045. Contributions are made almost entirely through the new system, there are almost no payments left through the old system. The difference between the remaining contributions and the pensions that have to be paid out has to be financed by the Chilean government. These conversion costs are a big burden for the government budget:
Contributors
All workers and employees must pay into the system. Mandatory contributions amount to 10% of the monthly income, the part of the monthly income that exceeds $2,800 U.S. (60 UF) is non-contributory. Self-employed individuals may contribute voluntarily, and salaried workers can also enhance their pension through additional voluntary contributions. The Chilean armed forces
The Chilean Armed Forces ( es, Fuerzas Armadas de Chile) is the unified military organization comprising the Chilean Army, Air Force, and Navy. The President of Chile is the commander-in-chief of the military, and formulates policy through the Mi ...
and police
The police are a constituted body of persons empowered by a state, with the aim to enforce the law, to ensure the safety, health and possessions of citizens, and to prevent crime and civil disorder. Their lawful powers include arrest and th ...
do not contribute in the workers pension system but participate in a separate PAYGO system.
The pension contributions are income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Tax ...
deductible
In an insurance policy, the deductible (in British English, the excess) is the amount paid
out of pocket by the policy holder before an insurance provider will pay any expenses. In general usage, the term ''deductible'' may be used to describe o ...
. The worker can choose one of six private pension administrators and change at will and also choose from among five funds (A to E, with A being the riskiest).
Administrative costs
The pension funds are privately administered. The amount of administrative costs are not regulated by law. But there a two-year obligation for a new affiliated to be included in a single fund, selected by public bidding, based in the level of administrative costs. The user contributes to their pension with a contribution of 10% of income. In addition, the user pays administrative costs in the order of 1% from income. The user don´t pay any cost while unemployed.
Coverage
The performance of the Chilean pension funds is not very good compared with the performance of private pension funds of developed countries
A developed country (or industrialized country, high-income country, more economically developed country (MEDC), advanced country) is a sovereign state that has a high quality of life, developed economy and advanced technological infrastruct ...
, but that performance is partly attributed to special factors. The amount of administrative costs was considered a problem of the Chilean pension system but have decreased significantly going from 15% in 1983 to 1,8% in 1993 of accumulated assets.
In addition to or instead of the regular private pension workers may be entitled to state aid:
Retired workers whose private pensions are below a defined level are entitled to minimum pension ''(Garantía de Pensión Mínima).'' In this case, the government pays an additional pension.[Joaquin Vial Ruiz-Tagle, Francisca Castro, The Chilean Pension System, ]OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
Ageing Working Papers, 1998, page 8
People who have paid in nothing or contributed less than 20 years may get social assistance, the ''Pensiones Asistenciales (PASIS)''. But the Pensiones Asistenciales are paid from a fixed budget that is usually not big enough to cover everyone in need.
The number of workers who actually pay into the pension system decreased from 64% in 1980 (before the reform) to 58% by 2006 According to Patricio Navia an Diego Portales University professor, most people perceive the costs of pensions and the pensions themselves as unfair. Therefore they try to evade pension contributions.
Andras Uthoff, the director of the ''Social Development Division'' of the United Nations Economic Commission for Latin America (ECLAC
The United Nations Economic Commission for Latin America and the Caribbean, known as ECLAC, UNECLAC or in Spanish and Portuguese CEPAL, is a United Nations regional commission to encourage economic cooperation. ECLAC includes 46 member States (2 ...
) states that the reformed Chilean pension system does not work with the reformed Chilean labor market because only a small percentage of workers are able to finance meaningful pensions.
According to the projection of Berstein, Larrain and Pino Rios from the year 2005 (based on data from the period 1981 - 2003) the kind of pensions to expect are predicted as following:
Sebastián Piñera
Miguel Juan Sebastián Piñera Echenique OMCh (; born 1 December 1949) is a Chilean billionaire businessman and politician who served as president of Chile from 2010 to 2014 and again from 2018 to 2022.
The son of a Christian Democratic polit ...
, the brother of José Piñera and later president of Chile, said during the presidential candidacy in 2006:
Pension reform of 2008
Under the Bachelet government, the pension system was reformed again in the year 2008. Andrés Velasco, the leading economic adviser to the government, addressed the two main problems as the coverage of the population and the amount of the administrative costs. Too many people are outside the pension system, and capital accumulation by using the pension funds is quite expensive The reform follows a recommendation by the World Bank
The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...
, who has found in the 1980 pension system a strong redistributive component at the expense of low paid or occasionally unemployed workers. A big part of the Chilean population is not able to finance meaningful pensions, because many workers are not able to regularly contribute a higher amount of money. Additionally many workers have difficulties to achieve the 20 years of contributions to at least qualify for minimum pension. Since the pension funds charge high fixed administrative costs per insured person and only a small portion of the administrative costs depend on the amount of the capital account, capital accumulation by pension funds is very unprofitable for workers with lower incomes. The World Bank therefore recommended that the minimum pension and the Pensiones Asistenciales should be abolished and instead introduced a public risk pooling device financed by VAT
A value-added tax (VAT), known in some countries as a goods and services tax (GST), is a type of tax that is assessed incrementally. It is levied on the price of a product or service at each stage of production, distribution, or sale to the en ...
tax revenue.
The reform includes mainly the following points:OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
: Latin American Economic Outlook 2008, , 2007, page 71, 72
* The minimum pension and the Pensiones Asistenciales were replaced by a tax-funded solidary pension system (SPS). All citizens older than 65 years, that lived in Chile for at least 20 years and do not have a private pension on a defined minimum level qualify for an SPS pension.
* The legally defined framework within which pension fund investments are allowed has been extended.
* Within a transitional period lasting until 2015, self-employed individuals are also to be integrated into the pension system.
See also
* Chile under Pinochet
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
* Economy of Chile
The Economy of Chile is a market economy and high-income economy as ranked by the World Bank. The country is considered one of South America's most prosperous nations, leading the region in competitiveness, income per capita, globalization, eco ...
* Chicago Boys
* Welfare reform
Bibliography
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*
*
External links
Pension Superintendency
''Supporting pension reform:''
International Center for Pension Reform
founded and headed by José Piñera
José Piñera Echenique (born October 6, 1948) is a Chilean economist, one of the famous Chicago Boys, who served as minister of Labor and Social Security, and of Mining, in the military dictatorship of Augusto Pinochet. He is the architect of Ch ...
himself
''Critical of pension reform:''
*
* Nicholas Barr:
The Truth About Pension Reform
', in: Finance & Development, September 2001, vol. 38, no. 3.
References
{{Americas topic, Pensions in
Chile
Chile, officially the Republic of Chile, is a country in the western part of South America. It is the southernmost country in the world, and the closest to Antarctica, occupying a long and narrow strip of land between the Andes to the east a ...
Society of Chile
Economy of Chile