Chile
The pandemic threatens the Chilean pension model: for the first time in 40 years Pinochet's party is pushing for a reform
In view of the economic crisis, Congress is close to approving a bill to modify the pension system. President Piñera is considering a veto.

The crisis caused by the coronavirus pandemic has had such an impact on the Chilean economy that for the first time in 40 years Congress is discussing a modification of the system of Pension Fund Administrators (AFP), the heart of the Chilean model.

As thousands of households despair over the lack of income and the Piñera government refuses to increase social spending for fear of spiraling the deficit, the opposition has introduced a bill that would allow people to withdraw up to 10% of their pension funds, a major change given that the current system prohibits access to these assets before retirement.

The Chilean pension system, which originated in the Pinochet dictatorship, is not based on the principles of social security, but rather on individual accounts under the logic of individual capitalization. This system is similar to those operating in the United States and Mexico.

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The dictatorship's flagship party, the UDI, is telling the government that in the face of its lack of response, they are willing to support the withdrawal of AFP funds. It is unprecedented that the architects of the AFP and the defenders of the dictatorship's legacy are now open to these types of changes.

This massive fund is close to US$200 billion, the equivalent of 80% of Chile's GDP. An amount that usually feeds the country's financial system and that is why it is so praised by its promoters, in addition to freeing the State from the heavy burden of having to deal with the pensions of senior citizens.

The other side of the coin is that 50% of retirees receive an income of less than US$190 per month and the general average is around 20% of the salary that person received before retiring from their activity, according to data from the Sol Foundation.

That is why for many years a large part of the population has been calling for reform, but the lobbying power of the AFPs has managed to stop any initiative. "The AFPs have managed to win over officials from different administrations, both from the right and from the left. It's the first time we've had an in-depth discussion, it's the most acute thing we've had in relation to the pension system," Chilean economist Marco Kremerman told LPO.

Marco Kremerman, economist with the Sol Foundation.

Interestingly, the seriousness of the current situation has provoked unanimous support for this bill from the entire center-left opposition as well as from the right-wing of the government, which is threatening to break up the government's coalition.

"The dictatorship's own flagship party, the UDI, is telling the government that in the face of its lack of response, they are willing to support the withdrawal of funds. It is unprecedented that the architects of the AFP and the defenders of the dictatorship's legacy are open to these types of changes," said Benjamín Sáez, another Chilean economist.

The depth of the economic and social crisis that triggered the pandemic has forged an unprecedented alliance in Chile between the center-left and the more right-wing side of the coalition that supports President Piñera, to reform the private retirement system.

In contrast, Piñera's top cabinet officials launched a major campaign against the proposal and are threatening a presidential veto over the alleged blow to future pensions.

However, the Sol Foundation maintains that the decrease in income ranges from barely 1.2% for women in their 30s to 3.4% for men in their 50s, touching 7% for women in their 50s and reaching 8.3% for men in their 50s.

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"We have looked at the project and do not think it is right to withdraw funds from social security accounts because of the consequences it may have in the future. We want to see a change towards a solidarity-based social security system and we are interested in the fund's continued growth. But in the face of a government that has not responded to the crisis, it is important to have the capacity to decide on the funds, and this also opens the door to new changes in the medium term," added Sáez.

Kremerman agreed, citing a parallel discussion that seeks to set employer contributions at six percentage points, half of which would go to a pay-as-you-go system.

"Today we have the possibility of discussing the pension system for the first time. Even those three points that had never been put on the table in the last 40 years are now obsolete," he said.

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