Chilean President Gabriel Boric this month unveiled his proposal to reform Chile’s pension system. // Photo: Chilean Government.

Chilean President Gabriel Boric on Nov. 2 unveiled his long-planned proposed reform of the country’s pension system. If lawmakers approve it, the reform would do away with the country’s existing private pension managers, known as AFPs, and would also require employers to pay an additional 6 percent of their workers’ wages to a publicly run social security system. How likely is the reform to win congressional approval, and what changes might lawmakers make to it? What are the most significant problems in Chile’s existing pension system, and to what extent would Boric’s reforms solve them? What are the biggest changes that current and future retirees would experience if the reforms win approval?

Alejandra Cox, president of AAFP Chile: “The bill that has just entered Congress would establish a new mandatory contribution to be allocated to a collective solidarity fund. This is a fundamental change to the existing system in which mandatory contributions have gone entirely to individual accounts, and where solidarity has been financed by general taxes. Moreover, if the bill is approved, the collection, account management, members care, and pensioners care would be centralized in a public body. The AFPs, which have been responsible for these functions by legal mandate for more than 40 years, would cease to exist. The centralization of the system contributes to monopolizing the administration of funds and is unlikely to lead to cost savings, as the government has suggested. A new autonomous public fund manager would administer the collective solidarity fund and compete with new private investors for the financial management of individual accounts, which would go by default to the public manager. The new contribution would be credited to notional accounts where 30 percent of each period’s collection would be distributed equally across contributors. There will be additional credits to the notional accounts based on time spent on maternity and other dependents’ care. The notional account would earn notional interest and be converted into an annuity, which will be added to the annuity generated by savings in the individual accounts. The proposed reform can increase pensions immediately in two ways. First, the solidarity pension, which was substantially improved in early 2022, would be further augmented. Second, the solidarity fund would finance immediate improvements to contributory pensions. Discussions on the reform proposal are starting. Immediate benefits are noted, but concerns are being raised on issues that include its effect on formal employment, the key to strengthen contributory pensions, implementation costs and risks, and the conditions under which the solidarity fund can combine sustainability and pension improvements for the young.”

Kathleen C. Barclay, director of AmCham Chile: “President Boric’s proposal will not be approved as currently drafted given the governing coalition’s minority in Congress. The first step will be to review the assumptions behind the government’s proposal to confirm its positive forecasts regarding employment, pension size and coverage. Additionally, analysis will be required on how the recently approved minimum guaranteed universal pension will work in the context of the government’s proposal. Issues for discussion include the advisability of turning over management of the administration of the pension system to the government, what percentage of the additional 6 percent will be used for redistributive purposes, the timeframe and mechanisms for transition to the new system, as well as proposals on by whom and how the funds will be invested. The changes need careful evaluation and have implications for workers, capital markets and foreign investment. Challenges facing the current system including the need to raise the retirement age, a larger increase in individual contributions and increasing the number of participants in the system. Today, there are high levels of informality in the work force and a lack of individual contributions by many self-employed workers, and those aspects are not addressed in the government’s proposal. Without addressing these points, it is unlikely that there will be a general increase in pensions. Overall, the main outcome of the government’s proposal is redistribution with a central role for the state in pension administration and management, as well as more active government involvement in the investment of pension fund monies.”

Andrés Pardo A., chief Latin America macro strategist at XP Investments: “Boric’s pension reform plan is unlikely to be approved in its current form given the government’s minority support in Congress, the president’s low approval ratings and the opposition’s increased political strength following the recent rejection of a new constitution in a ratifying referendum. However, the chances of reaching a middle-ground agreement are high, as political forces widely agree that the current pension system is socially unsustainable. The main topics that will likely be subject to legislative changes are the financing sources and the destination breakdown of the additional 6 percent contribution of workers’ wages, the financing of higher pensions through subsidies (both in the expanded noncontributory pillar and the new mixed contributory one, as well as those aimed to reduce gender inequality), the separation of investment and account management activities (with the latter being assigned solely to a government-run entity, which generates a lot of controversy), the role and institutional framework of a new public investment manager (which will not only compete with private entities in managing individual savings but will also manage the entirety of collective savings with individual registry originated in the additional 6 percent contribution), the transition to new investment management commission charges based on account balances, the inclusion of proposals aimed at fostering much-needed labor formalization and measures that may discourage contributions to pension savings, among others. Yet, despite significant room for improvement, the current proposal complements the existing individual capitalization system by improving and expanding coverage of pension payments to most citizens, and it keeps and strengthens the individual savings pillar, which has been key to investment and to capital markets development in Chile.” 

Jennifer Pribble, associate professor of political science and global studies at the University of Richmond: “Chile’s pension system faces multiple challenges, but chief among them is that most workers do not save enough to finance a pension that will sustain them during retirement. While the state supplements private savings with a minimum pension, the value of that benefit is small, and many find it insufficient to cover even the most basic costs of living. Chile’s private system also replicates labor market inequalities, allowing high-income earners with a steady employment record to secure sizable and livable pensions, while lower-income workers, women and those employed in the informal sector are left with meager benefits. This aggravates inequality and more recently has contributed to social and political upheaval. Chile’s current pension system also leaves AFPs relatively unregulated, allowing for high administrative costs that eat away at workers’ savings. Boric’s proposed reform would address some of these problems by increasing contributions to workers’ accounts and by building a slightly more robust and redistributive public system. Moreover, the elimination of AFPs, and their replacement with new private investment managers, opens the way for a stronger regulatory framework and the introduction of competition from a public provider. Though the reform enjoys public support, Boric faces an uphill battle to pass the initiative. The president has low approval ratings. Moreover, the country’s political parties have grown increasingly weak and undisciplined in the wake of the 2019 social explosion. This, alongside a fragmented Congress, makes negotiation—a crucial element of a successful reform—very difficult.”

Jorge Heine, research professor at the Frederick S. Pardee School of Global Studies at Boston University and a former cabinet minister in the Chilean government: “On the face of it, approval of the government’s pension reform bill should be a no-brainer. The Chilean pension system, 72 percent of whose pensions are below the minimum wage, has long been a contentious issue. Its reform was one of the key demands of the Oct. 18, 2019 social uprising. Today, 56 percent of Chileans are in favor of abolishing the AFPs, which is exactly what the government’s bill proposes to do. It also proposes an eminently sensible 6 percent contribution by the employers (who today contribute nothing). Another measure, like splitting the administration of retirement accounts from the financial management of the pension funds, is the prudent thing to do. Far from moving to an all-out pay-as-you-go system, the bill keeps the current individual retirement accounts. Over time, pensions would increase by 46 percent for men and 52 per cent for women if the bill was approved. Yet, the government does not have a majority in Congress. Also, the defeat of the new constitution on Sept. 4 left the president weakened, and prospects for the bill are uncertain. Emboldened by its victory last September, the right is unlikely to compromise on what it considers to be a signal achievement of military rule: the dismantling of the Chilean welfare state. Much as abolishing the AFPs is emblematic for the ruling coalition, defending their existence and the profit motive in the pension system is red meat for the right. Boric is in for a tough fight.”

The Latin America Advisor features Q&A from leaders in politics, economics, and finance every business day. It is available to members of the Dialogue’s Corporate Program and others by subscription.