Beyond Contributory Pensions
Pension reforms in Latin America have shifted between an emphasis on coverage, adequacy, and sustainability.
A Daily Publication of The Dialogue
Chilean opposition senators on May 13 introduced legislation to nationalize the country’s pension system. The lawmakers brought the measure forward as a constitutional amendment, sending it to the chamber’s constitutional committee. Should Chile’s pension system be nationalized? How would such a move affect current and future retirees? What chance does the proposed nationalization have at passing?
Alfonso De Urresti, Chilean senator and co-sponsor of the pension system nationalization bill: “Pension Fund Administrators (AFPs) are a failed system in Chile. Our country must move toward a real social security system. Under the promise of various benefits of capitalization and individual savings, the dictatorship in 1981 established a pension system based on access to compulsory savings and insurance markets. However, for more than 39 years, we have seen that the AFPs allow their controllers to obtain millionaire profits and generate for them tremendous economic power through the capital market, one that does not translate into better pensions for our citizens. Our pension system has no elements of community sustainability. It barely offers benefits in accordance with individuals’ ability to save and displaces those who were unable to contribute. The AFPs deliver to each individual the value of their contributions under the logic of an individual contract, relegating the majority that does not have optimal conditions to generate relevant savings. This leads to older adults who retire through the AFPs ending up with insufficient and miserable pensions. We propose the repeal of Decree Law 3,500 of 1980 by which the AFPs were created. To replace it, we propose the creation of a Solidarity Pension System, which includes a universal basic pension, old-age pension, disability pension and survival pension. In addition, a solidarity basic pension system and a universal basic pension will be established. The system will be financed on a tripartite basis, with equal contributions from the worker and the employer. The state contribution will be defined in the budget law every three years. It has been said that we want to nationalize contributors’ resources. That is false. Our project determines that the contributions saved in individual accounts administered by AFPs will continue to be workers’ property and must be transferred to the Institute of Social Security, which will grant each worker a certificate, a document that will record their balance, updated online. Chile needs to move toward a new mixed pension system that maintains positive elements, linked to the incentive to save society but framed in a scheme of true social security.”
Fernando Larraín, director general of the AFP Association of Chile: “A group of five Chilean senators has introduced a bill to nationalize the private pension system. The move intends to provide the state with quick cash. It is a populist and dangerous bill that seriously harms Chile’s position in the world. This is similar to what happened in Argentina in 2008. The initiative is dangerous because it aims to expropriate people’s life savings in order to give to others who have never saved. Also, the proposal does not discuss how it will improve the pension system for the future. It is well known that in order to raise pension amounts for the future, you need to increase the contribution rate, postpone the retirement age and increase the density of contributions, among other measures, none of which are covered by the lawmakers’ proposal. This is a project based on an ideological and populist measure that increases uncertainty in the country, takes out the money of workers to give it away for political purposes and destroys a system under a false promise that pensions are going to be better in the future. Chile is well known for its institutional capacity, the quality of its public policies and respect for the rule of law. What these five lawmakers are doing is not only delaying the economic and social development for Chile, but also taking away each person’s individual savings in the pension system. We need to improve pensions for everybody, there is no doubt, but populist measures such as this one go in the opposite direction, and that does not benefit the society.”
Kathleen C. Barclay, former president of the American Chamber of Commerce in Chile: “The Chilean Congress is unlikely to approve the proposal regarding nationalization of the private pension system. As drafted, it would not benefit Chilean retirees. It would move management to the government without addressing underlying issues related to an aging population: the need to save more and to deal with frequent periods of time when workers do not contribute as well as the large number of informal workers who do not save and who do not have access to the solidarity pillar available to the most vulnerable. Moreover, the proposal lacks legislative rigor. Submitting a proposal with limited possibility for success is particularly unhelpful at a time when efforts need to be focused on consensus and confidence building to develop real solutions for the social and economic challenges coming out of the pandemic. It also raises doubts as to the commitment of the senators proposing the legislation to the constitutional reform process that was agreed to last November, which is fundamental to dealing with the social issues that sparked widespread discontent in October of last year. It is important to send signals of certainty supporting Chile’s solid institutions—this is critical for the roughly 5.5 million workers who have their savings in the private system, as well as for the local capital markets and foreign investors who will need to finance economic recovery and employment going forward. Actions need to be focused on moving forward the pension reform that the lower house of Chile’s Congress passed, which does address certain underlying issues and will send signals of unity and certainty.”
Peter Winn, professor of history and Latin American studies at Tufts University: “The privatization of Chile’s pension system was imposed by the Pinochet dictatorship during the economic crisis of the 1980s. Its goal was to provide an injection of capital into a depressed stock market by placing the savings of Chile’s workers in the hands of the country’s capitalists through for-profit administrators, the AFPs. The workers were not consulted. The result has been pensions so small that they are unlivable, high administrative costs and large AFP profits that do not depend entirely on the stock market, unlike worker retirement accounts, whose value fell dramatically during the recent Covid-19 stock market crash. Even before the recent crisis, Chilean discontent with the privatized pension system had spawned No+AFP (No More Privatized Pensions), one of Chile’s strongest social movements, which played an important part in the protests of 2016 and 2019. The Covid-19 pandemic has underscored to Chileans that the AFP system is broken. It was within this context that five leftist senators introduced a constitutional amendment that would nationalize the pension system and create ‘solidarity’ pensions with tripartite contributions by workers, employers and the state, so that the elderly poor can enjoy a decent retirement and workers can have stable retirement accounts. The AFPs would still administer complementary and voluntary contributions. Because Pinochet’s authoritarian constitution is very difficult to amend, it is highly unlikely that a constitutional amendment nationalizing the privatized pension system will be enacted in 2020, especially if Chile’s beleaguered state would have to pay for the individual retirement accounts. But the debate will focus attention on a system that is so broken that minor reforms cannot fix it.”
Olivia S. Mitchell, International Foundation of Employee Benefit Plans Professor and executive director of the Pension Research Council at The Wharton School of the University of Pennsylvania: “There is no ‘best’ pension system: every country needs to find its own way to structure retirement security, while taking into account economic reality and cultural values. Chile’s current combination of an antipoverty pillar and a funded defined contribution pillar is one of the most thoughtfully and sensibly constructed retirement systems around the world. I served on the Bravo Commission for Chilean Pension Reform and was pleased to offer my advice to the nation and my fellow commissioners at that time. The economists’ proposal to enhance the solidarity pillar while increasing coverage and raising contributions was, and still is, the best path for Chile. We also proposed raising the retirement age over time for everyone, an inevitable move to be able to finance retiree pensions. Moving to a ‘reparto’ system in Chile is not viable given its rapidly aging population. Nationalizing peoples’ hard-earned savings invested over the past almost 40 years will result in a bankrupt funded system and an impossible burden for the ‘reparto’ system, not to mention eroding peoples’ trust in the economy. This plan would set back growth and economic development, and Chileans will live to deeply regret destroying the funded retirement program that has been held up as a model around the world.”
Sergio Urzua, associate professor in the Department of Economics at the University of Maryland and international research fellow of Clapes-UC: “Latin America is becoming a fruitful landscape for questionable political actions for remodeling pension systems. The lack of political will has postponed the necessary parametric reforms of the region’s fully funded systems, raising the voices of those seeking drastic but ineffective reforms. The reasons behind Argentina’s decision to terminate the funded scheme and return to the pay-as-you-go scheme in 2008 (nationalization of private funds) are typically misunderstood or simply forgotten, while the outcome of Casa Rosada’s U-turn is understudied. The intentions could have been good, the outcomes not so much. Chile’s latest developments illustrate that conundrum. Back in 2014, a presidential commission was appointed to assess and propose changes to Chile’s pension system. After 16 months of technical debate, fueled by the complex political aspects of any reform, only one out of 24 members endorsed the nationalization of the pension system. And yet, five years after the commission’s report, part of Chile’s Congress remains naively in love with the idea. Chile’s pension system needs adjustments. The contribution rate is too low, the increasing trend of informality must be stopped, the solidarity pillar extended and high-quality financial education secured, among others. In light of a political class unwilling to compromise, its nationalization might emerge as an appealing idea to some. However, it would represent a monumental misstep. An aging population, the need to fund massive public deficits and a mediocre growth forecast would jeopardize the sustainability of such a system. The evidence defying its promises should cut its chances. But in these unprecedented times, evidence-based policy does not necessarily set the rules.”
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