Populist politicians are destroying Chile’s revolutionary pension system. In 1981 Chile became the first country to privatize social security, ending the pay-as-you-go system that had been in place since 1924 and had collapsed. Now Chile’s left wants to resurrect it.
The state-run pension system was plagued by corruption and rent-seeking since its earliest days. Among the 11,395 laws passed by the Chilean Congress between 1926 and 1963, 10,532 granted pension privileges to special-interest groups, many of them politically connected. In 1968, Chilean President Eduardo Frei, a center-left Christian Democrat, described the cronyism that plagued social security as an “absurd monstrosity” that the government couldn’t afford.
Pension privatization reversed this perverse dynamic. Instead of taxing active workers to pay pensioners through the bureaucracy, the new system, created by former Labor Minister Jose Pinera, established that 10% of the employee’s salary is transferred automatically to an account under his name at one of the Administradoras de Fondos de Pensiones, or AFP. These private pension funds compete to attract workers and invest their pensions for a fee.
This has restored the link between contributions and pension benefits by making workers responsible for saving the funds that will support them once they retire. This novel system also limited corruption and rent-seeking, and Chilean taxpayers are no longer on the hook for pension deficits, which in 1981 represented 3% of gross domestic product.
Longer life expectancy is also a problem. When the AFP system was created, men retired at 65 with an average life expectancy around 67. Women retired at the age of 60 with a life expectancy around 74. Today, the retirement ages are unchanged but life expectancy has increased to 77 for men and 83 for women. This means more years of retirement have to be funded by the same years of saving.
Chile’s privately run pension funds are in a battle for survival, reeling under the impact of billions of dollars of withdrawals as politicians and social movements attack a system once viewed as a model for the world.
Chileans have taken out more than $30 billion from their retirement savings in the past year and congress has authorized a third wave of withdrawals that could drive the figure to more than $50 billion. That would leave the pension funds with about $180 billion of equities and fixed-income assets. Many lawmakers are now calling for the whole system to be dismantled.
Created during the dictatorship of August Pinochet on the advice of free-market economists known as the Chicago Boys, the private pensions Chileans are required to fund are a bedrock of the country’s system. The savings they have generated over the past four decades have given local credit markets and the peso a stability that is the envy of serial defaulters such as Argentina or Ecuador, and prompted countries including Peru and Colombia to adopt similar structures. Yet, many complain that the funds have failed to provide decent pensions.
Distrust in the system, and a need for cash, meant Chileans rushed to pull money out of their savings accounts as the pandemic forced the government to shutter much of the economy.
[this relates to people in Chile being allowed to taking fairly large withdrawals from their official retirement savings]
This Monday, the application process will begin through digital platforms within the framework of the new 10% third withdrawal law.
As detailed by the Undersecretary of Social Welfare, Pedro Pizarro, the process will begin 100% online during the first two weeks of May, both for AFP users and for the nearly 700 thousand pensioners through the life annuity modality , who for the first time may request a cash advance.
Chilean President Sebastian Pinera on Sunday announced the government will launch its own bill to allow citizens to draw more from their private pensions in a last-ditch attempt to kill off a similar move led by the opposition.
Pinera said his proposed rival bill would be subject to means-tested taxation and would allow for the withdrawn funds to be gradually repaid through state and employer contributions.
The president said his initiative was a better option than the opposition’s bill, which the government says would leave millions of future pensioners with little to no savings.
Chile´s Congress on Friday approved by a large majority a move to allow citizens to withdraw a third tranche of their privately held pensions to assuage economic hardship wrought by the coronavirus pandemic.
Lawmakers in the country´s lower house approved the measure with 119 to 17, with 3 abstentions, prompting cheering and applause. Senators greenlighted the move earlier this week.
Previously, Congress approved two withdrawals of 10% from pension pots in July and December, with the help of members of President Sebastian Pinera’s Chile Vamos coalition who defied instructions to vote the initiatives down.
Across Chile — which has mounted one of the world’s most rapid vaccination campaigns using the vaccine made by Chinese drugmaker Sinovac Biotech Ltd. — health authorities are scrambling to deal with a surge in new infections and deaths.
More than 7.6 million people, half of Chile’s adult population, have received at least one vaccine dose, most made by the Chinese drugmaker, making the country a testing ground for a vaccine Beijing is supplying to countries across the developing world.
The problem, public-health officials say, was that people in general overestimated the effectiveness of the vaccine after only one of the two recommended doses and moved to ease up on pandemic-control restrictions too soon.
“With one dose, we know the protection is very weak,” said Claudia Cortes, an infectious-disease expert at the Santa Maria Clinic in Santiago, where about 10% of the Covid-19 patients at her hospital have received one shot. “It was not clearly explained that you need two doses — that you need to wait.”
Chile’s Labor Minister María José Zaldívar submitted her resignation Wednesday to President Sebastián Piñera, who accepted it and announced he would appoint Deputy Patricio Melero to succeed her.
Zaldívar’s intentions to leave her job were no surprise as the pension reform failed to go her way. ”I highlight her tireless effort to carry out the reform of the pension system to improve the benefits of millions of current and future pensioners and lay the foundations for a fairer, more supportive pension system with better pensions,” said Piñera.
But Senate Speaker Adriana Muñoz of the opposing Party for Democracy (center left), expressed her dissatisfaction: “It seems complex to me to continue holding this debate with a government that changes our interlocutors every three months.”